From a most “ho-ho-hopeful” time of year, early 2017 has quickly turned into despair for retail stocks following warnings from department store operators Macy’s Inc (NYSE:M) and Kohl’s Corporation (NYSE:KSS).
But is it fair to lump retail stocks all together and summon up chatter of a retail recession? Probably not, though fear-mongering does sell 24/7.
The fact is, one might be reminded just days ago the President-elect was tweeting, “the world was gloomy before I won — there was no hope. Now the market is up nearly 10% and Christmas spending is over a trillion dollars!”
All the buying Donald Trump was referring to must be going somewhere, right? Of course, Amazon.com, Inc. (NASDAQ:AMZN) comes to just mind if you’re a consumer like me and open up a recent bank statement.
As important, retail stocks span from online and traditional brick-and-mortar sellers to those companies doing the actual manufacturing of goods such as apparel, accessories, games and toys, cosmetics, housewares — which consumers are buying by the boatload apparently.
Bearing all this in mind, let’s take a look, both off and on the price chart, of Thursday’s retail stock scream team Macy’s and Kohl’s, as well as athletics giant Nike Inc (NYSE:NKE) and specialty retailer Ulta Salon, Cosmetics & Fragrance, Inc. (NASDAQ:ULTA). From there, let’s see if there’s more to the story and actual investment opportunities beyond the headlines.
Retail Stocks to Mix and Match: Macy’s (M)
It appears very little of the $1 trillion bounty President-elect Trump was beating his chest over found its way inside of Macy’s this holiday season.
Consumers might still devour the company’s celebrated Thanksgiving Day parade each year, but actual foot traffic inside Macy’s stores was poor enough to result in the announced closing of dozens of stores nationwide and force the retail stock to issue downside guidance.
The fact is, though, the problems facing Macy’s are nothing new.
Thursday’s news is part of an ongoing effort by the company to close underperforming sites and streamline operations. Macy’s is focused on being able to invest more heavily in its digital footprint and growth areas like Macy’s Bluemercury beauty outlets.
So, where to now? Given M stock reflects a good dose of pessimism near its 52-week lows, respecting management’s steps to remain competitive and embracing Macy’s still venerable name, like-minded investors might consider shopping for a buy-write.
Reviewing the M options board, investors can purchase the at-the-money Feb $31 buy-write for $29.51 versus $30.86. This offers income of about 5% and, in our view, is better than a Macy’s “One Day Sale.”
Retail Stocks to Mix and Match: Kohl’s (KSS)
Kohl’s was the other retail stock responsible for screams and dire warnings of a “retail recession” in yesterday’s trading session. Like Macy’s, Kohl’s holiday numbers were disappointing and resulted in the company slashing guidance.
Unlike M stock, my view is that KSS isn’t in the bargain bin just yet. Aside from how Kohl’s simply isn’t the brand Macy’s is, this retail stock doesn’t offer anything new to investors, other than a convenient place to shop. And that, of course, obviously isn’t working.
Further — and despite being off around 19% Thursday — KSS stock is warning of lower prices ahead. A bearish gap below its 200-day simple moving average and 62% Fibonacci support suggests the May low is in play for bearish investors.
Reviewing the KSS options board, the February $42.50/$37.50/$32.50 put butterfly is attractive given what’s been said.
Priced for $1.15, the spread maintains a nice-sized expiration profit range from $33.65 to $41.35. The profit area capitalizes on anticipated downside pressure for this retail stock, while allowing a bearish investor to position with limited risk and vastly reduced capital commitment.
Retail Stocks to Mix and Match: Nike (NKE)
Similar to Nike’s “Just Do It” slogan, this strategist believes investors should simply purchase NKE stock.
No doubt, uncertainties abound for the athletics giant. This seems especially true given the President-elect’s views on international trade — and specifically the impact a trade war with China could have.
More pragmatically, campaign bluster and actually getting new legislation through are two entirely different animals. Having said, that we’re less than certain of the “it’s going to be a great deal” rhetoric despite how many times he has tweeted it.
More certain, I see a better deal in Nike shares right now. Looking back from the low of the financial crisis, a dismal showing in 2016 for this retail stock translates into NKE stock’s most prominent-looking correction.
Shares of Nike could always go lower, but with the stock starting to turn upwards, it’s time to “just do it” with a limited-risk collar strategy for longer-term investors.
With the retail stock at $53.70, one classic-looking spread is the NKE Feb $57.50/$50 collar, which trades for $53.84. Using this strategy, the investors return is initially capped at 6.8%, while offering guaranteed protection below $50. So don’t worry if the ‘swoosh’ turns into a nasty ‘whoosh’ — the collar has you covered!
Retail Stocks to Mix and Match: Ulta Salon (ULTA)
Last up on our list of retail stocks that show it’s not wise to lump everything together into warnings of a “retail recession” is Ulta Salon.
I haven’t personally been inside an Ulta Salon. However, the brick-and-mortar store front does show that, given the right blend of product and service, consumers will still drive to the mall.
At the end of the day, some things simply can’t be done online — and Amazon’s drone strategy is probably not considering manicures as part of its business strategy, when that program does finally take off.
The success of this retail stock’s niche offerings is very apparent in shares of ULTA. Ulta Salon hit its all-time high of $278.63 back in August. Since that time, the stock has been backing and filling in a corrective base pattern above 200-day simple moving average support.
While Ulta is relatively new to the scene, its chart pattern is a classic, albeit slightly volatile, high-level “W” pattern. The price action is recognized by growth traders as the type of base to watch for strong, potential breakouts from.
It should be noted ULTA’s recent earnings beat on Dec. 1 resulted in a bearish engulfing candlestick. Shares of this retailer have managed to hold that day’s low, but I’d respect the warning by waiting to enter on a second attempt above the mid-pivot of $268.78.
Should ULTA show growth traders a bit of her past glamour and trigger another breakout, I’d look to buy a slightly out-of-the-money bull call spread. Verticals such as the $275/$280 or $285/$295 bull call spread reduce risk and won’t expose the trader to increased risk should a second attempt look even worse than the first lipstick-style red blemish from December.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT