Will Alibaba's Sales And Profits Hit Strides Despite Stepped-Up Competition?

| About: Alibaba Group (BABA)

Summary

Given the move out of apparel and department stores, some analysts aren’t pinning high hopes on M’s results.

Since January, M also has closed a number of stores and consolidated some operations.

BABA has appeared to sidestep China’s economic woes, mostly owing to the relative absence of bricks-and-mortar stores on the mainland, according to analysts.

It's likely to be a consumer - spending tale of two retailers, among others, when Macy's (NYSE:MA) and Alibaba (NYSE:BABA) - at opposite ends of the retail machine and the world-turn in quarterly results ahead of the bell Thursday. Are consumers spending, and if so, on what?

M and Investors Look to the Future

Given the move out of apparel and department stores, some analysts aren't pinning high hopes on M's results. In Q1, M blamed the stronger dollar for the glitch in tourism sales at some of its flagship Bloomingdales and Macys stores in cities like New York, Las Vegas, Chicago, and Los Angeles. And then there's the so-called "Amazon effect" that some retail analysts insist is behind the shift in consumer shopping behavior, shifting to online and away from brick-and-mortar stores in places like shopping centers and malls. But analysts are also bracing for news of deep discounts and, of course, steamy weather that may have kept shoppers indoors. Any good news is likely to come in the form of sales projections for the back-to-school season, the second most important shopping period of the year.

What some analysts want to hear about is the future, both in the near-term and long-term. Long-time Chief Executive Terry Lundgren has said he's grooming his successor at a time when activist shareholders are urging M's board to maximize the value out of its real estate. Since January, M also has closed a number of stores and consolidated some operations. Has that helped improve margins?

On the Q1 conference call, M executives warned that sales guidance for the year would likely be weak and that Q2 same-store sales, an important industry metric of growth, would likely fall or improve only slightly.

Analysts reporting to Thomson Reuters are at a consensus forecast of per-share profits of $0.40, 28% below the year ago results. M has turned in five straight quarters of diminishing bottom-line results. Revenues, too, have dropped in the five last quarters and are projected to again, to $5.7 billion from $6.1 billion a year ago.

Short-term options traders have priced in a 6.75% potential share price move in either direction around the earnings release, according to the Market Maker Move™ indicator on the thinkorswim®platform by TD Ameritrade.

Options activity has been light with some puts trading at the monthly 33-strike and 32.5-strike and calls trading at the 35-strike line. The implied volatility is in the 45th percentile. (Please remember past performance is no guarantee of future results.)

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price 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.

Figure 1: Slipping ahead of Earnings. M shares have lost 50% of their value in the last year and have failed to find traction amid record highs on the three major market benchmarks. Data source: Standard & Poor's. Image source: the TD Ameritrade thinkorswim® platform. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

BABA on the Run

BABA, meanwhile, is a retail bird of a different feather, given its e-commerce and mobile payments platforms, not to mention its home turf in China, where it generates almost 73% of total revenues.

BABA has appeared to sidestep China's economic woes, mostly owing to the relative absence of bricks-and-mortar stores on the mainland, according to analysts. And though it's facing stepped-up competition on both the e-commerce and payments platforms in China, it has taken aggressive steps to stem the tides, such as its increased investment in Ant Financial, the affiliate that operates Alipay, analysts note.

To that end, analysts reporting to Thomson Reuters are looking for gains in both sales and profits, though they note that investments have taken a bite out of earnings. For the quarter, the consensus sits at $0.63 a share in earnings, a 7% gain in local currency over the year-ago results, while revenues are expected to grow nearly 47% to $4.5 billion.

Short-term options traders have priced in a 4.25% potential share price move in either direction around the earnings release, according to the Market Maker Move indicator.

Options trading has been active in puts at the weekly 84-strike and the monthly 80-strike. On the call side, trading has been active at-the-money at the 85-strike as well as the monthly 90 strike. The implied volatility sits at the 8th percentile.

Figure 2: BABA ON THE RUN. BABA shares managed to shake off a slight pullback in late June to advance 14% since then and trade in the range of the 52-week high. Data source: Standard & Poor's. Image source: the TD Ameritrade thinkorswim® platform. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

TD Ameritrade® commentary for educational purposes only. Member SIPC. Options involve risks and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.