Foot Locker Stock Looking To Avoid Another Post-Earnings Collapse

When FL shares have had a negative earnings reaction, the losses have been steep

Managing Editor
Nov 15, 2017 at 10:51 AM
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Retail stocks have been in focus lately as earnings season rolls on. The next big name up is shoe retailer Foot Locker, Inc. (NYSE:FL), which will step into the earnings confessional before Friday's opening bell. Given how fellow retail peers Target (TGT)  and Dick's Sporting Goods (DKS) fared after earnings, Foot Locker's earnings reaction is highly anticipated. Here's a closer look at FL stock's performance lately, and how options traders are positioning themselves ahead of earnings.

Foot Locker stock has shed 58% year-to-date to trade at $30.77, and the 30-day moving average has acted as resistance since late September. The shoe retailer bottomed out last Wednesday at $28.42, a five-year low. Foot Locker's struggles are indicative of the retail sector's broader troubles lately. According to data from Schaeffer's Senior Quantitative Analyst Rocky White, the 75 stocks in the retail sector are averaging an average year-to-date return of negative 1.8%.

Historically speaking, Foot Locker's post-earnings reactions have been dismal, with the stock finishing lower in four out of the last eight quarters. This includes a 27.9% drop in August, and a 16.7% dip back in May. Overall, the security has averaged a move of 10.3% regardless of direction in the session after the last eight earnings reports.

For Friday's trading, the options market is pricing in a bigger-than-usual 18.8% post-earning swing in either direction, based on at-the-money implied volatility data. A drop of that magnitude would send the stock to the $25 area, its lowest point since 2012.

Short sellers are hoping for a repeat of August's performance. Short interest increased by 39% during the last two reporting periods to 14.43 million shares, the most since June 2016.

In the Foot Locker options pits, meanwhile, speculators have taken a sharp bearish tone in recent weeks. The security's Schaeffer's put/call open interest ratio (SOIR) of 1.38 ranks two percentage points from an annual high. This shows an extreme preference toward short-term puts over calls.

Digging deeper, the November 23 put saw the largest increase in open interest during the past ten days. However, data from the major options exchanges shows almost exclusive sell-to-open activity at the strike, so options traders are betting on FL stock holding above $23 through Friday's close, when the front-month options series expires.

 

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