Earnings Preview: Nordstrom, Inc., Kohl's Corporation, and J C Penney Company Inc

Nordstrom, Inc. (NYSE:JWN), Kohl's Corporation (NYSE:KSS), and J C Penney Company Inc (NYSE:JCP) are on tap to report earnings this week

May 11, 2016 at 11:14 AM
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Retail stocks are in focus this week, amid a slew of earnings announcements and the latest retail sales data -- due out Friday. Yesterday, for instance, Gap Inc (NYSE:GPS) took a sharp tumble following the firm's dismal same-store sales report and dreary first-quarter forecast, while today, shares of Macy's, Inc. (NYSE:M) are plunging in the wake of disappointing quarterly results. This earnings-related action is set to continue through week's end, with retailers Nordstrom, Inc. (NYSE:JWN), Kohl's Corporation (NYSE:KSS), and J C Penney Company Inc (NYSE:JCP) on deck to report. Here's a quick look at the pre-earnings options activity surrounding JWN, KSS, and JCP.

JWN put players have been targeting near-the-money strikes among options set to expire at next Friday's close, per the stock's top-heavy front-month gamma-weighted Schaeffer's put/call open interest ratio (SOIR) of 1.74. In fact, JWN's May 47.50 strike is home to peak put open interest of 11,704 contracts, and, according to Trade-Alert, it looks like there's been a mix of buy- and sell-to-open activity here. Those buying to open the puts expect JWN to settle south of the strike when the options expire, while those writing the puts to open were betting on $47.50 to serve as a short-term floor.

However, thanks to sector-related headwinds from M, shares of JWN were last seen down 6.9% at $45.50, ahead of tomorrow night's earnings report. True to form, though, Nordstrom, Inc. has turned in a terrible performance this month, down 11% thus far. Meanwhile, the options market is pricing in a single-session post-earnings move of 12% for JWN -- slightly larger than the 6.8% swing the stock has averaged over the past eight quarters.

Short-term options traders have rarely been as call-heavy toward KSS as they are now. In fact, the security's SOIR of 0.61 rests lower than 98% of all comparable readings taken in the past year. Drilling down, peak call open interest is found at the May 42.50 strike, where more than 9,500 contracts reside. It looks as if the majority of the action has been of the buy-to-open kind, as options traders eye a breakout above $42.50 by next Friday's close. It's getting relatively expensive to purchase these near-term bets, too, as evidenced by KSS' Schaeffer's Volatility Index (SVI) of 64% -- in the 72nd percentile of its annual range. In other words, premium on the stock's short-term options is pricing in heightened volatility expectations at the moment.

Looking back over the past eight quarters, KSS has averaged a single-session post-earnings move of 5.2%. This time around, the options market is expecting a bigger swing of 11%. Ahead of tomorrow morning's earnings report, shares of Kohl's Corporation have dropped 5.7% to linger near $38.84, and are fresh off a seven-year low of $38.62. Longer term, KSS has plunged 48% year-over-year. Separately, KSS is hosting its annual shareholders meeting today.

Outside of last week's massive bullish bet, JCP options traders have shown a preference for long puts over calls in the lead-up to Friday morning's earnings report. Specifically, the equity's 10-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) put/call volume ratio of 1.04 ranks in the 74th annual percentile. This action is continuing today, with JCP's put/call volume ratio docked at a top-heavy 4.32. It looks as if pre-earnings speculators are buying to open JCP's weekly 5/13 7.50-strike put, betting on a retreat below $7.50 by Friday's close, when the weekly series expires.

At last check, the stock was off 1.8% at $7.95. This only echoes JCP's recent trajectory, with the shares down almost 34% from their March 8 two-year peak of $11.99. The options market, meanwhile, is projecting a massive 18% post-earnings swing for Friday -- much bigger than the 9.7% move J C Penney Company Inc has averaged in the session subsequent to reporting, going back eight quarters.

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