L Brands Stock Swings Higher on Profit, Revenue Beats

Short sellers may have been hedging against a positive earnings reaction

May 24, 2018 at 10:12 AM
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The busy stretch of retail earnings continues today, with L Brands Inc (NYSE:LB) among the latest to unveil its quarterly results. Last night, the Columbus, Ohio-based company reported better-than-expected first-quarter profit of 17 cents per share and revenue of $2.6 billion, sending LB shares up 1.6% to trade at $34.61.

However, the Victoria's Secret parent also gave disappointing current-quarter profit guidance and cut its full-year earnings outlook, which may have prompted Deutsche Bank and Nomura to cut their price targets to $44 and $29, respectively. The last time LB stock traded near $29 was in mid-2011, though it hit a six-year low of $30.70 on May 10.

Today's price action runs counter to the equity's longer-term trajectory. Since topping out at an annual high of $63.10 on Dec. 26, L Brands stock has shed 45% -- pressured lower by its 20-day moving average.

Nevertheless, call buying on LB ramped up ahead of earnings. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 10-day call/put volume ratio of 1.48 ranks in the 82nd annual percentile, indicating long calls have been initiated relative to puts at a quicker-than-usual clip.

However, it's possible short sellers were purchasing out-of-the-money calls to hedge against any post-earnings upside risk. Short interest rose 4% in the most recent reporting period to 16.37 million shares. While this is far below December's multi-year peak of 26.82 million shares, it still represents a healthy 7.3% of the LB stock's available float, or 4.4 times the average daily pace of trading.

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