Bullish Bets on Saks and TJX Earnings

by Joseph Hargett | November 12, 2012 8:44 am

Prior to September, the retail sector was outperforming the broader market. In fact, the SPDR S&P Retail ETF (NYSE:XRT[1]) was easily beating the S&P 500 Index, rallying more than 20% through Sept. compared to the SPX’s gain of about 14% for the same period. However, election concerns and global economic pressures have since taken their toll on retailers, sending the sector into a tailspin alongside the boarder market.

Typically, earnings reports provide a bit of leverage for companies, with better-than-expected reports creating buoyancy for depressed stocks. However, as Macy’s (NYSE:M[2]) and Kohl’s (NYSE:KSS[3]) found out last week, strong quarterly reports don’t always guarantee a post-earnings rally, especially when Wall Street is in a selling mood.

Two more retailing specialists join the earnings fray this week, with TJX (NYSE:TJX[4]) and Saks (NYSE:SKS[5]) stepping into the limelight ahead of the open tomorrow morning.

If bears are still in control, be sure to take precautions and hedge your bets. For instance, those placing a bullish bet on either TJX or SKS might want to pair such a bet with an XRT December 60 put, which closed Friday with an ask price of $1.57, or $157 per contract. Breakeven lies at $58.43 — a drop of about 4.2% from Friday’s close. That said, any breakeven or profit calculations should include your positions on TJX and/or SKS if you are using this as part of a pair trade.

When it reports earnings on Tuesday, upscale fashion clothier Saks is expected to post a third-quarter profit of 12 cents per share — a rise of about 9% from the same quarter last year. Revenue is seen rising 4.8% to $725.7 million. Historically, Saks has bested the consensus estimate in three of the prior four reporting periods, with an average upside surprise of about 18%.

Despite the company’s solid fundamentals, only three of the 13 analysts following SKS rate the shares a buy or better, compared to eight holds and two sells. The average 12-month price target rests at $11.50 — a modest premium of 14.42% to the stock’s close at $10.05 on Friday.

The takeaway from this data is that there’s room for improvement if Saks can convince the brokerage community to budge from its bearish stance.


Technically speaking, SKS has been beaten down during the past month. In September, the stock was rejected by long-term resistance at $12, but SKS is currently approaching former support at $10. This area is make-or-break for SKS bulls, with the shares on the verge of single-digit territory.

Still, following the recent plunge, SKS is nearing oversold territory, creating a potential opportunity for investors willing to take a chance.

On the options front, November implieds appear to be pricing in a post-earnings move of 6.5%. However, with November options expiring at the end of the week, December options would be a much less stressful investment.

Taking this into consideration, traders might want to consider a December 10 call. This option was offered at 60 cents, or $60 per contract, at the close on Friday. Breakeven lies at $10.60 — a 5.4% premium to Friday’s close.

Turning to TJX, Wall Street is projecting a 17% rise in third-quarter profit to 62 cents per share. The consensus has risen during the past month by about a penny, with the company’s strong 7% jump in October same-store sales and boosted third-quarter outlook on Nov. 1 playing a role. Revenue is expected to rise 9.6% year-over-year to $5.79 billion.

Still, TJX has some history to overcome before it can count the brokerage bunch on its side. Historically, the company is on steady footing in the earnings realm, matching the consensus estimate in each of the prior four reporting periods.

TJX has attracted one sell, 10 holds and 16 buy ratings, indicating a skew toward the bullish end of the spectrum. The median 12-month price target for TJX rest at $50 — a premium of 23% to Friday’s close at $40.37.


On the technical front, TJX has entered one of its worst corrections since the 2009 bottom. The shares have broken down below long-term support at its 10-week and 20-week moving averages, pulling back to round-number support at the $40 level. A similar correction occurred between March and September of 2010, with TJX ultimately rebounding from the $20level to enter a nearly two-and-a-half-year rally.

This isn’t to say that TJX is on the verge of another multi-year rally, but the odds of a post-earnings rebound appear to be pretty good. November implieds are pricing in a 5.6% move following Tuesday morning’s report, meaning that a November 40/42.50 bull call spread has a high likelihood of hitting its maximum profit.

That said, bumping that spread back to the December series could help you save some stomach lining.

At the close on Friday, a TJX December 40/42.50 bull call spread was asked at $1.05, or $105 per pair of contracts. Breakeven lies at $41.05 — a gain of less than 1% from Friday’s close. A maximum profit of $1.45, or $145 per pair of contracts, is possible if TJX closes at or above $42.50 when December options expire.

As of this writing, Joseph Hargett didn’t hold a position in any security mentioned here.

  1. XRT: http://studio-5.financialcontent.com/investplace/quote?Symbol=XRT
  2. M: http://studio-5.financialcontent.com/investplace/quote?Symbol=M
  3. KSS: http://studio-5.financialcontent.com/investplace/quote?Symbol=KSS
  4. TJX: http://studio-5.financialcontent.com/investplace/quote?Symbol=TJX
  5. SKS: http://studio-5.financialcontent.com/investplace/quote?Symbol=SKS
  6. [Image]: https://investorplace.com/wp-content/uploads/2012/11/Hargett-SKS-Daily-Chart-11-12.jpg
  7. [Image]: https://investorplace.com/wp-content/uploads/2012/11/Hargett-TJX-Weekly-Chart-11-12.jpg

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