Earnings Preview: Michael Kors Holdings Ltd (KORS) and J C Penney Company Inc (JCP)

Retail stocks Michael Kors Holdings Ltd (KORS) and J C Penney Company Inc (JCP) are getting ready to report quarterly earnings

Nov 10, 2016 at 3:38 PM
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Retail stocks are flying high today on the tailwinds of Macy's Inc's (NYSE:M) earnings results, but several names in the sector are still due to step into the earnings confessional. Specifically, Michael Kors Holdings Ltd (NYSE:KORS) will reveal its latest results after the close tonight, while J C Penney Company Inc (NYSE:JCP) will report tomorrow morning. Below we'll take a look at how traders and analysts have been aligning themselves on KORS and JCP heading into the respective events.

KORS is up 3.3% at $51.86 today, widening its year-to-date lead to nearly 30%. After a few recent bounces off the 30-day moving average, the shares are now taking aim at the $52 level, which has served as both resistance and support since February. 

Analysts appear to have low expectations for KORS heading into tonight's report. Of the brokerage firms following the stock, 75% maintain a rating of "hold" or "strong sell." There's a fair amount of pessimism among traders, too. Though short interest has been falling of late, these bearish bets still account for roughly a week's worth of trading, at KORS' typical daily pace.

Looking to the options pits, speculators have been targeting calls over puts in recent weeks. KORS holds a 10-day call/put volume ratio of 4.19 at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) -- higher than 89% of comparable readings in the past 12 months. Still, it's possible some call buyers have been short sellers looking to hedge their bets against an upside surprise.

Judging by recent history, a move to the upside after earnings shouldn't be too great a surprise. KORS has moved higher in session subsequent to reporting 50% of the time over the last eight quarters, with an average one-day move of 10.9% in either direction. The options market is currently pricing in a slightly wider 12.3% swing for Friday.

Taking a closer look at today's action, Michael Kors Holdings Ltd (NYSE:KORS) puts and calls are both trading at about three times the normal rate for this point in the day. Some traders appear to be eyeing the round $50 level, as the weekly 11/11 50-strike call and put are among the most active contracts. However, it's unclear whether positions are being bought or sold at these strikes.

Shifting our attention to JCP, the stock has tacked on 5.8% at $8.85, bringing its 2016 lead to 32.2%. But the shares are still staring up at the $9 level, which has served as both support and resistance several times since 2015, and roughly coincides with JCP's 50- and 200-day moving averages -- two trendlines that formed a "death cross" earlier this week.

Like its peer above, JCP has failed to inspire confidence among analysts. More than half of the brokerage firms tracking the stock recommend holding or selling the shares. Meanwhile, 26% of JCP's total float is wrapped up in short interest. At the equity's average daily volumes, it would take almost six days to cover all these pessimistic positions.

All these short positions suggest hedging may also be a factor in the preference for call buying among JCP options traders. The stock's 50-day ISE/CBOE/PHLX call/put volume ratio of 2.54 sits just 8 percentage points from an annual high. Notably, near-term speculators have been taking a different approach. The stock's Schaeffer's put/call open interest ratio (SOIR) of 1.67 -- near the top quartile of its 12-month range -- shows puts far outweighing calls among options set to expire in three months or less.

Traders may have good reason to take a bearish stance ahead of JCP's earnings. The stock has moved to the downside in the session after its earnings report in five of the last eight quarters, with an average swing of 8.5% for the session. Today the options market is pricing in a much wider 15.9% move.

Call and put options are both changing hands at triple the usual intraday rate in JCP's options pits this afternoon. Leading the action is the November 9 put, where a block of more than 16,000 contracts traded earlier -- a trade Trade Alert indicates was tied to J C Penney Company Inc (NYSE:JCP) shares. That's not the only speculator targeting the $9 level, either. The next most active option is the November 9 call, where it appears a mix of buy- and sell-to-open action has occurred.

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