Earnings Preview: Gap Inc and Abercrombie & Fitch Co.

Pre-earnings options traders have low expectations for Gap Inc (NYSE:GPS) and Abercrombie & Fitch Co. (NYSE:ANF), as both retailers prepare to report third-quarter results

Nov 17, 2016 at 11:26 AM
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Retailers are the highlight of this week's earnings calendar, and the action isn't over yet, with Gap Inc (NYSE:GPS) set to report after tonight's close and Abercrombie & Fitch Co. (NYSE:ANF) tomorrow morning. Below, we'll take a look at how these two retail stocks have been faring on the charts of late, as well as how each has historically performed after earnings. Plus, we'll examine how traders in and out of the options pits have been aligning themselves on GPS stock and ANF stock ahead of earnings.

It's been a solid year so far for GPS, which has added nearly 22% in 2016 and tapped a fresh annual high of $30.55 earlier -- although the stock was last seen off 0.8% at $30.20. The shares have had several gaps higher since bottoming at a four-year low of $17.00 in mid-May, and have outperformed the broader S&P 500 Index (SPX) by 35 percentage points over the past two months alone. It looks like the stock is now trying to gain a convincing foothold atop the round $30 level, which shut down a substantial rally back in March.

Despite its strong technical performance of late, GPS is still surrounded by skepticism. Out of 23 analysts following the stock, only three recommend buying the shares. And short interest represents 15.7% of the equity's total float, or nearly two weeks' worth of buying power, at GPS typical daily volumes.

Turning to the options arena, GPS puts have been popular. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), speculators have purchased 1.80 puts for each call over the past 20 trading days.

Looking back over the past eight quarters, GPS stock has made a move to the upside in the session after earnings four times, including the last two in a row. More broadly, shares of Gap Inc have averaged a one-day post-earnings move of 3.8% in either direction over this period, and options traders are currently pricing in a somewhat wider 5.6% swing for Friday.

Shifting our attention to ANF, the stock has had a much rougher go of it, shedding 39% of its value year-to-date. And while the shares are up 1% at $16.46 today -- after recently reclaiming the 30-day moving average -- the $17 mark is looming just overhead. This area served as support in June and September, but rejected the stock earlier this week.

Heading into earnings, both analysts and traders have set the bar low for ANF. A full 80% of brokerages covering the stock call it a "hold" or worse. And short interest has been on the rise, now representing more than one-quarter of the stock's available float. Based on ANF's average daily volume, it would take nearly eight sessions to buy back all these bearish bets.

Pessimism is running high in the options arena, as well. ANF currently sports a 10-day put/call volume ratio of 2.24 at the ISE, CBOE, and PHLX, showing long puts more than double calls. Moreover, this ratio sits in the bearishly skewed 81st percentile of its annual range.

Pre-earnings speculators have plenty of reason to be skeptical. While ANF has moved higher in the session subsequent to reporting earnings five times in the last eight quarters, the stock has been slammed the past two quarters in a row -- dropping 20.3% and 15.7%, respectively. Regardless of the direction, the stock could be due for some post-earnings volatility, considering its average swing in the session subsequent to reporting is a hefty 13.4%. This time around, options traders are pricing in a 13.9% move for Abercrombie & Fitch Co. in tomorrow's trading.

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