Current Conditions May Matter More For Macy's, Home Depot After Late-Year Bumps

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Includes: AMZN, HD, JWN, M
by: JJ Kinahan

Summary

Like much of the broader markets, M stock has gotten beaten up since last summer, down more than 32% since then.

Implied volatility for M is relatively low at the 59th percentile compared to the 80th percentile and above ahead of earnings for other retailers reporting earnings.

Analysts are looking for HD earnings of $1.10 a share, a 10% jump over the year-ago period.

Two consumer-sensitive retailers, Macy's (NYSE:M) and Home Depot (NYSE:HD), will take to the earnings stage before the markets open Tuesday, potentially lending insight into what consumers were buying in Q4. They're two of a handful of retailers that will share quarterly results this week.

The looming reports leave investors wondering, did shoppers snatch up apparel and accessories for the important holiday gift-giving season? Or were their hard-earned dollars spent sprucing up their homes, perhaps as more sellers look to test the housing market with a 2016 listing?

Weather and other seasonal factors are often at work in retail earnings. Plus, traditional and specialty retailers continue to face tough competition from Amazon.com (NASDAQ:AMZN) and others.

Wall Street may want to look past the economic slowdown of late last year and focus on current conditions. On Friday, the Commerce Department said January U.S. retail sales excluding automobiles, gasoline, building materials, and food services increased 0.6% after an unrevised 0.3% decline in December. This so-called core retail sales figure is believed by Street economists to correspond most closely with the consumer spending component of gross domestic product. The January reading was stronger than the rebound Street economists had banked on.

Already Braced for Reality?

Macy's gave investors a heads-up twice in January, saying then that earnings and revenue were going to fall short of its own forecasts as it slashed jobs and failed to finish a development transaction that would have boosted revenues. M acknowledged then that holiday same-store sales, a key measure for retailers, fell 4.7%. Add to that the disappointing results from Nordstrom (NYSE:JWN) late last week and the overall downturn in the department-store sector, and safe to say, industry analysts aren't expecting blockbuster results.

At last check, analysts reporting to Thomson Reuters are forecasting a per-share profit of $1.88 on top-line sales of $8.83 billion. Compared to results in the same period last year, that's a 23% drop in profit on a 6% decline in revenue.

Like much of the broader markets, M stock has gotten beaten up since last summer, down more than 32% since then (figure 1). But while the start of the year brought deep broad-market dips, M managed to climb 17%.

Short-term option traders have priced in a potential 4% share price move in either direction around the earnings release, according to our indicator.

Implied volatility is relatively low at the 59th percentile compared to the 80th percentile and above ahead of earnings for other retailers reporting earnings.

Trading has been active in the monthly options primarily, with call-side buyers lining up at the 41 strike and put option buyers most notable right at the money at 39.

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price and over a set period of time. Put options represent the right, but not the obligation, to sell the underlying security at a predetermined price over a set period of time.

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Figure 1: Solid Start. Macy's shares are up roughly 17% so far this year, outrunning the broader market. But its place in a struggling sector has been apparent, too: Nordstrom's results dragged its stock, as well as M's, down last week. Chart source: TD Ameritrade's thinkorswim platform. Data source: Standard & Poor's. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Home Depot and Housing

HD's results could paint a different story than much of the rest of the retail sector, industry analysts argue. The home-improvement giant had solid earnings earlier in 2015 and its stock has reflected that, climbing 24% for last year (figure 2). But since the start of 2016, investors have pushed HD shares down as part of a broader-market decline and at a time when the housing market recovery is showing a few cracks, according to recent government and industry data.

At Thomson Reuters, analysts are looking for earnings of $1.10 a share, a 10% jump over the year-ago period. Revenues are expected to rise 6% to $20.37 billion.

It's the upcoming spring home selling season that may matter most as Wall Street listens in on the conference call. What do top HD executives see on the housing horizon, both in new and existing homes?

Short-term option traders have priced in a potential 3.5% share price move in either direction around the earnings release, according to our indicator.

Like M, HD's implied volatility isn't super cranked up, sitting at the 60th percentile.

Wall Street may already be conditioned to expect retail-sector challenges in the short term. But that could mean the stock market is vulnerable to a surprise from any of the handful of stores, including M and HD, reporting this week. Stay tuned.

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Figure 2: At the Broader Market's Mercy? Home Depot shares have largely gone the way of the broader stock market so far in 2016. Will that relationship remain? Chart source: TD Ameritrade's thinkorswim platform. Data source: Standard & Poor's. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

TD Ameritrade commentary for educational purposes only. Member SIPC. Past performance no guarantee of future results. Options involve risks and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options.

Disclosure: I am/we are short HD.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.