One of my favorite retailers to play options on is Kohl’s Corporation (NYSE:KSS), and with the company scheduled to report earnings Thursday morning, there may be an opportunity for both the bears and the bulls.
Analysts are expecting the company to earn $1.04 a share on revenue of $4.16 billion. The high estimate is pegged at $1.12 a share, with a lowball number at 94 cents.
This could mean a headline beat 8 cents or an earnings miss of 10 cents a share. But, of course, we’ll need to take a deeper dive into Kohl’s prospects to know more.
What’s Up Kohl’s Sleeve?
Kohl’s missed last quarter’s estimate by 6 cents. In the two prior quarters, profits came in 2 cents and 6 cents higher. In the year-ago period, the company missed the estimate by 9 cents. Although KSS is highly profitable, the sketchy earnings history over the past year and current cutthroat retail environment makes it hard to trust.
Some channel checks by various boots-on-the-ground analysts have said that inventories were up and that poorer quality items are not selling so well. I don’t personally shop at Kohl’s, but I have noticed that the parking lot at my local store looks deserted during shopping hours. If inventory is a drag, Kohl’s might have to sell its spring and summer digs at a discount.
The bullish argument is that Kohl’s recently announced a new partnership with Under Armour Inc (NYSE:UA) in an attempt to add more “hipster” clothing. However, inventory write-offs could cause an earnings miss and a lowered outlook for the rest of 2016. Additionally, UA products won’t be available at Kohl’s stores nationwide until early 2017.
KSS shares fell 4% on Tuesday and are trying to hold the 50-day moving average at $38, which is in a rising uptrend. The 100-day moving average is just south of $40, and there is a good chance that shares move 5% to 10% following the earnings announcement. This means a move above $41 or below $37 could be in the mix.
Click to Enlarge As an option trader, this is the type of action I look for when determining to go long or short, but I’m a little hesitant this time around with analysts so bearish.
However, traders could hedge a KSS trade using both call and put options.
Place Your Bets on KSS Stock
As a directional trade based on weaker fundamentals, bearish traders could target the KSS Aug $37.50 puts for a debit of 70 cents. These options are very risky, as the stock would need to fall below $36.80 by next Friday to break even. However, if shares slide below $36.10, these options would return 100% from current levels.
The KSS Aug. $42.50 calls for 35 cents could be used by bullish traders looking for a “beat-and-raise” quarter. These options would double from current levels if shares clear $43.20, technically, in nine days.
Both aforementioned options, purchased together, would create a “strangle” option trade for a combined premium of $1.05. The breakeven price, technically, would be below $36.45 or above $43.55 by next Friday. A 100% return could be achieved if KSS shares fall below $35.40 or clear $44.60 by Aug. 19.
The technical outlook looks bullish despite the sloppy bearish fundamentals. I don’t like the setup going into the earnings announcement, and with these options expiring in less than two weeks, I will likely stay on the sidelines this time around.
There could be a trade afterward on KSS, but I don’t like the risk/reward setup right now. A “sell-the-news” event looks likely, but this would still be a risky trade.
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