This is retail week for earnings reports. Wal-Mart Stores, Inc. (NYSE: WMT), Lowe’s Companies, Inc. (NYSE: LOW), The Home Depot, Inc. (NYSE: HD), Nordstrom, Inc. (NYSE: JWN), Sears Holdings Corporation (NASDAQ: SHLD), Urban Outfitters, Inc. (NASDAQ: URBN)?, Abercrombie & Fitch Co. (NYSE: ANF), The Gap Inc. (NYSE: GPS) and Limited Brands, Inc. (NYSE: LTD), to name a few, all report this week.
For this week’s earning trade, let’s take a closer look at American Eagle Outfitters (NYSE: AEO), the maker of apparel aimed at teens and the young 20s set. The company is scheduled to report before the open on Thursday.
Analysts expect a profit of 28 cents per share from AEO, and odds are that’s exactly what the company will deliver. Why? Well, AEO has hit the consensus analyst estimate on the button in seven of the past eight quarters. The one miss was by a whopping penny. Makes you wonder how these estimates have been so exact.
Despite hitting the estimate regularly, AEO seems to deliver surprises with its reports. We know that because the stock really moves after earnings. In fact, over the past four quarters, the shares have moved an average of 8.5% in just the one day after reporting — three higher, one lower.
We’re betting on a pop higher for a few reasons. First, the stock has been cooling its heels for the past month, dropping toward the support of its 200-day moving average. That tells us that investors are lukewarm toward the shares, which sets ups a low-expectation environment.
Second, sentiment is also indicating that expectations are muted. Short interest is sitting at an annual high, and just 11 of 27 analysts rate the stock a “buy.” A short squeeze and analyst upgrades are certainly possibilities.
Third, the option open interest configuration supports upside movement. Once November options are cleared from the field this weekend, the December series shows peak calls at 17 and peak puts at 15. That tells us that there’s a lot more room for the stock to run (10%) than to decline (3%).
Finally, recent retail sales numbers have been pointing higher and there’s optimism for a decent holiday shopping season. AEO saw a marked improvement in back-to-school sales and recently raised its Q3 outlook. Given that the earnings number will likely fall in line, AEO’s outlook will be key.
Based on low expectations and huge moves after earnings, we expect AEO to surge after earnings on Thursday. Because November options expire this week, go with the AEO Dec 15 Calls, which should carry you through the crucial part of the holiday shopping season.
