Analysts Expect Weak Retail Sales – A Bearish Look at the Retail Sector

There is news from London this morning of US retailers’ stock futures taking a downturn in anticipation of lower than expected earnings. Many retailers will release their first quarter earnings today and experts are saying the results could be tepid because of a colder than normal April.

Audio Podcast:
An audio podcast of this article is available at: poweropt.com/podcasts/2007_05_10_Retail.mp3

It is anticipated companies such as the Gap (GPS), Wal-Mart (WMT) and Target (TGT) all experienced lower than average first quarter earnings.Last Month was the coldest April in 10 years. Compare this to April of 2006 where temperatures were warmer than they had been in over 110 years. Analysts suspect the cold weather coupled with the way Easter fell on the calendar (Easter weekend is typically a strong retail sales weekend) resulted in weak April sales.

Other retailers expecting lower April numbers include Talbots (TLB), Abercrombie and Fitch (ANF), Ann Taylor (ANN), and Gymboree (GYMB).

An investor may feel this will cause a temporary dip and wish to capitalize on the temporarily lower stock prices. However Target, The Gap and Urban Outfitters are all hovering at the top of their 52-week price range and may be more susceptible to a setback than a Wal-Mart who is at or near their 52-week low.

This article serves as an example of how the average investor can identify the most attractive option trade based on their view of whether a stock will rise or fall. If an investor’s view is bullish, they might choose to use bull call debit spreads or bull-put credit spreads to make money off their hunch. If an investor believes a stock will fall, they might choose bear put debit spreads or bear-call credit spreads.

Potential Trades:
Below we take a look at bear-put debit spreads involving Target (TGT), The Gap (GPS) and Urban Outfitters (URBN). The PowerOptions website has a convenient tool to search for bear put debit spreads. It allows the user to customize their search using over 50 parameters, giving an investor the ability to find the right trade.

TGT -Target Stores. This trade offers 75.40% potential profit if the stock lands below $57.50. If the stock increases above the break-even price of $59.65, the investment will begin to lose money. If the stock price goes above the higher strike price of $62.50, the entire investment is lost. The max risk of this trade, per 100 options, is $285.00. Target is currently trading at $59.16.

GPS -Gap Stores. This trade offers 31.60% potential profit if the stock lands below $17.50. If the stock increases above the break-even price of $18.70, the investment will begin to lose money. If the stock price goes above the higher strike price of $22.50, the entire investment is lost. The max risk of this trade, per 100 options, is $380.00. The Gap is currently trading at $18.43.

URBN – Urban Outfitters. This trade offers 58.70% potential profit if the stock lands below $25.00. If the stock increases above the break-even price of $26.85, the investment will begin to lose money. If the stock price goes above the higher strike price of $30.00, the entire investment is lost. The max risk of this trade, per 100 options, is $315.00. Urban Outfitters is currently trading at $26.29.

Competitors:
Competitors for TGT include: Costco Wholesale Corp. (COST), Wal-Mart Stores Inc. (WMT), Kmart Corporation (private), Bed Bath & Beyond Inc. (BBBY), Big Lots Inc. (BIG), Charming Shoppes Inc. (CHRS), Gymboree Corp. (GYMB), Penney (J.C.) Co. Inc. (JCP), Kohls Corp. (KSS), PetsMart Inc. (PETM), Sears Holdings Corp. (SHLD), Stage Stores Inc. (SSI), and Tuesday Morning Corp. (TUES).
Competitors for GPS include: Abercrombie & Fitch Co. (ANF), American Eagle Outfitters Inc. (AEO), J. Crew Group, Inc. (JCG), American Eagle Outfitters Inc (AEOS), Carter`s Inc. (CRI), Guess Inc. (GES), Gymboree Corp. (GYMB), Iconix Brand Group Inc. (ICON), Limited Inc. (LTD), New York & Company Inc. (NWY), Childrens Place Retail Stores (PLCE), Urban Outfitters Inc. (URBN), and Wet Seal Inc (WTSLA).
Competitors for URBN include: Abercrombie & Fitch Co. (ANF), Bebe Stores, Inc. (BEBE), Pier 1 Imports Inc. (PIR), and Aeropostale Inc. (ARO).
For more information about how to identify and research great option trades, visit the PowerOptions website. There you will find the data you need to make quick, clear, and informed decisions. You can trade knowing you have found the best investment. Also, PowerOptions will allow you, with a few quick clicks, to quickly and accurately compare trades. PowerOptions‘ premium customer support is second to none in the industry. They can be easily contacted when you need them at their toll-free number to answer customer questions. Call them now toll free at 877-992-7971.

PowerOptions provides a free 14-day trial of its service. So join PowerOptions today, and you too can start reaping the benefits of the covered call investment strategy.

PowerOptions‘ sister company PowerOptionsApplied provides expert stock option trading recommendations. PowerOptionsApplied specializes in covered calls, naked puts and iron condor stock options strategy recommendations. PowerOptionsApplied provides a 30-day risk free trial of its service.

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