JWN Q2 Preview and Thoughts

by Enis August 9, 2012 1:21 pm • Commentary

Event: JWN is set to report their Q2 earnings after the close tonight. The options market is implying a 5% move following the report, close to their 8 qtr average of 4.5%.  Interestingly, the stock has sold off on 6 of the last 8 reports, even though it has actually beat estimates on 6 of the last 8 reports.

Sentiment: JWN is rated with 15 buys, 9 holds, and 2 sells among the 26 analysts that cover the stock.  The average 12 month price target is 57.55, relatively low relative to current spot of 55.25.  Short interest is 3% of float.  

Price Action:  JWN has mirrored the market’s move relatively closely over the course of this year, rallying until April, selling off hard in May, and now back near the highs of the year, up 11% in 2012.  In fact, JWN’s correlation to the consumer discretionary sector as a whole has been quite strong, exhibiting between 60 and 90% correlation over the past 3 years.  However, ever since its weak earnings report in May, the stock has been on the lower end of that 3 year range, between 60 and 70% correlated to the broader sector.

Technicals:  The stock is less than 10% away from its all-time high set in 2007 at $59.70.  Its intraday high for 2012 was on May 3rd, at 57.75, and its intraday low was set on June 5th, at 46.27.  Looking at a much longer time frame, the 20 year chart shows a potential double top pattern forming if the stock holds below the 60 level:



Here is the 3 year chart to get a sense for the bull market uptrend:



The $46-$48 range is the clear support, with $57.5, this year’s high, as natural resistance.


Fundamentals/Valuation:  This is a 17 P/E name with a 2% dividend yield, with forward earnings growth projections of 10-15% over the next 2 years.  It is a purely domestic retailer, getting 100% of its revenues from the U.S.  This is a pure play, high-end American department store, operating 231 stores in 31 states.

Consensus earnings estimate is 0.74, with a consensus revenue estimate of $3.01 bln.  When the company missed estimates in May, and guided lower, it did say that it expected 2nd half gross margins to improve relative to the 1st half of the year, so there is some expectation of improvement here.


August ATM options are about 40 vol, which is high for recent months, but low for some of the craziness the stock has shown in the past few years. Here’s a look at vol in the stock the past 2 years:

The red line is implied vol across all months, blue the actual vol of the stock, and yellow the yearly average of implied vol. This stock is capable of big upward swings in vol during uncertain times, and then low vol during rallies.

The ATM straddle in August is about 2.65 at 40 vol. Depending on the move in the stock, that is likely to drop 10-15 points tomorrow morning. September ATM vol is 30 and would likely only fall into the mid 20’s following earnings.


MY VIEW:  Based on commentary from a broad swath of consumer products companies in the U.S., it’s hard to see JWN delivering a blowout quarter.  However, they are facing their own lowered expectations after lowered guidance in May, and the same store sales number on August 2nd was better than expected, indicating some improvement over the course of the summer.  But it’s hard to see this stock breaking out on the upside given the tepid overall backdrop.  With the stock only 4% from 5 year highs, the risk/reward seems especially tilted to the downside.

We are evaluating a few different trades in a couple different expirations, we will back if anything looks that compelling.