New Trade RL – Luxury No Longer in Vogue

by Enis October 26, 2012 3:11 pm • Commentary

Here’s a preview of what I’ll be talking about on Options Action tonight on CNBC at 5pm:

Event:  RL reports their Q3 Wednesday Oct 31st before the open.  The options market is implying about a 6%  move (based on our implied move calculator), vs the 4 qtr avg move of about 4.5% and the 8 qtr avg move of about 6.75%.

Sentiment: Wall Street remains is somewhat positive on the stock with 8 Buys, 8 Holds and 1 sell, with an avg 12 month price target of ~$175.  Short interest sits around 3% of the float.

Fundamentals:  We’ve talked extensively about global growth slowing, and how October is the month for mutual funds to lock in winners,  well Ralph Lauren seems to fit the bill on both those counts.  A few quick points:

  • The P/E around 20 for RL is similar to where it was 1 and 2 years ago, but current growth rate has slowed.  Luxury  growth dependent on global growth
  • Earnings have generally been poor over the last year, but even when a high-end retail name beats (like COH), the stock initially rallied but has since sold off.  Investors and Traders are not believing in future growth on the high-end
  • Time of year for profit-taking.  Stock is up more than 350% since the 2009 lows, and 40% since the start of 2011.

Ralph Lauren seems poised for a bit of a long-term pullback in the next 2 months, and that’s the setup we’re using for this trade.

Price Action/Technicals:  Here are the charts, courtesy of Carter Worth:

A rounding top pattern.
A head and shoulders forming in the last year
Massive outperformance in the last year, relative to its peers.

MY VIEW: I don’t have any special insight into what RL is going to report on their earnings release next week.  But I do think the broader market backdrop presents a very difficult picture for RL over the next couple months.  That’s why I chose a Dec put spread instead of a Nov put spread, as it gives me more time for the macro concerns to play out.

TRADE: RL ($152)  Bought Dec 145 / 135 put spread for $2.80

-Bought 1 Dec 145 put for $5.40

-Sold 1 Dec 135 put at $2.60

Break-Even on Nov Expiration:

-Profits btwn 142.20 and 135, make up to 7.20, with max gain of 7.20 at 135 or below.

-Losses up to 2.80 btwn and 142.20 and 145, max loss of 2.80 above 145.