Discount Retailers Ready To Step Into Earnings Confessional

Both DG and DLTR are pricing in larger-than-average post-earnings moves

Managing Editor
May 30, 2018 at 12:39 PM
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Retail stocks are bringing up the rear of earnings season, with Dick's Sporting Goods (DKS) coming in as the latest big winner. Tomorrow, discount retailers Dollar General Corp. (NYSE:DG) and Dollar Tree, Inc. (NASDAQ:DLTR) report first-quarter earnings before the open. Ahead of the event, both stocks are pricing in a larger-than-normal move. 

Record Highs On The Horizon For Dollar General Stock

Over the last eight quarters, Dollar General stock has closed higher in the session after the company reports earnings five times -- including the two most recent. On average, the shares have swung 5.9% the next day, regardless of direction. This time around, the options market is pricing in a bigger one-day move of 9.9%, based on implied volatility data.

A move of similar proportion Thursday would vault DG stock past its Jan. 29 record high of $105.82. The shares have gained 31% in the last 12-months to trade at $96.65, and their 160-day moving average has contained the last two pullbacks this year. 

Dollar General Chart YTD 160MA

In the options pits, the stock's Schaeffer's put/call open interest ratio (SOIR) of 1.12 is in the 94th percentile of its annual range, implying that short-term options traders have rarely been more put-biased during the past year. An unwinding of pessimism in the options pits could also be a tailwind for DG shares.

Dollar Tree Stock Vulnerable To Downgrades

DLTR stock dropped 14.5% in the session after earnings in March. However, the security has closed higher the day after earnings in six of the past eight quarters. For Thursday's trading, the options market is pricing in a 8.9% post-earnings move, more than the 6.8% swing the security has averaged over the last two years.

Another post-earnings dip of similar magnitude could send the stock to its lowest point since October. On the charts, DLTR has shed nearly 18% since touching a record high of $116.65 on Jan. 31 to trade at $96.29. Following the post-earnings bear gap in March, the shares have seen the $100 level serve as resistance. 

Daily DLTR Chart

Yesterday, Raymond James downgraded the security to "outperform" from "strong buy." Should DLTR struggle again post earnings, more bearish brokerage attention could follow. Of the 22 brokerages covering Dollar Tree, 16 rate it a "buy" or "strong buy," with not a single "sell" on the books. Furthermore, the equity's average 12-month price target of $111.88 sits well above the stock's current perch.

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