I have been talking about the weakness in retail stocks over the past few weeks, and one company that will face a crucial test after Thursday’s close is Gap Inc (GPS).
Gap has been around for decades, and it continues to struggle against the competition. Just as different fashions come in and out of favor, investors are clearly showing their displeasure with GPS stock. Shares are at fresh 52-week lows, and they are approaching multi-year lows as well.
Gap is down from a 52-week peak just south of $40, and the 57% haircut has been hard to stomach. The technical setup is a mess, and the major moving averages are in a severe downtrend. Lower lows look to be a given, but I often mention that trading around earnings can be tricky.
Click to Enlarge As you can see in the chart, the downward “gaps” have resulted from lowered forecasts and revenue misses.
Last week, shares dropped over 11% after Gap reported its fifth-consecutive month of declining sales.
Management also warned Wall Street that the company would miss current estimates for earnings of 32 cents a share. Revenues were expected to come in north of $3.5 billion, but they are now obviously in question.
The numerous downgrades by analysts this year alone have been plenty, and there are just too many to list at this point in the story. Although the stars are aligned perfectly for a test to the mid- to low-teens, a possible deal with Amazon.com, Inc. (AMZN) has kept me cautious about shorting GPS stock.
The company’s CEO, Art Peck, went on record Tuesday to say that the company was considering using AMZN as an option to grow its brand again.
Here is an excerpt from his comments at the annual shareholder meeting:
“To not be considering Amazon and others would be — in my view — delusional. We are always considering all of the opportunities beyond our traditional mix of channels and stores. Amazon is certainly one, and there are others as well.”
This was a powerful statement by Gap’s top brass and one that could make for a bullish argument if a deal between the two companies were to be announced. Amazon has stated its desire to be the one-stop shop for all of our needs, and it recently announced that it wants to launch private label brands and a restaurant delivery service.
As far as Gap is concerned, the big question is how well a partnership with Amazon would work out.
As you can see, this is still a tricky trade to make given how the boat is already leaning and the lowered numbers that are already factored into the equation. Usually, when too many people lean to one side of the boat, it tips over. However, if Gap’s future remains in question and sales come in dramatically lower, then the bears could stay in charge.
With the regular May options expiring this Friday, they are basically all-or-nothing trades if you are looking at long calls or puts.
GPS Stock Options
The GPS May $17.50 calls (GPS160520C00017500, 32 cents, down 11 cents) could be used by bullish traders expecting a move above $18, which is basically the breakeven price for the trade. If Gap shares rally to $18.50, technically, by this Friday, these options would return a triple-digit profit.
The GPS May $17.50 puts (GPS160520P00017500, $0.65, up $0.05) are an option for bearish traders, with a breakeven price of $16.85. These put options would double from current levels if shares are below $16.20 by this Friday’s close.
As a “straddle” option trade, both options could be purchased together for 97 cents, and shares would need to be above $18.47 or below $16.53 to break even. A double on a straddle trade with the aforementioned call and put options would occur if shares are above $19.60 or below $15.40.
With that said, I will likely be sitting on the sidelines when Gap reports on Thursday, as shares will need to move 10% or more for a May directional trade to be profitable.
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