Name That Trade: $URBN Renewal

by Dan August 29, 2013 2:19 pm • Commentary

Last night URBN announced that they had authorized a share repurchase program for up to 10 million shares, as there prior buyback from Aug 2011 had been fulfilled.   Back on Aug 19th, URBN reported Q2 earnings that were better than expected, despite missing slightly on revenues as the company avoided severe markdowns that hurt other teen apparel companies like ANF, AEO & ARO in the quarter.  I am sure there are plenty retail investors who wish they got the memo in early 2013 that it was not going to be a good year to own teen retailers that start with an A, as the 3 listed above have massively under-performed the broad market and their peer group with an average decline of ~29% ytd.   Despite under-performing the broad market, URBN has shown very good relative strength to the aforementioned teen retailers, and is up 8% ytd.  


From purely a technical perspective, URBN’s one year chart is very constructive, spending nearly 95% of the last year above its 200 day moving avg (yellow line) with strong near term support at $40, and fairly important long-term at $38.  What I find most interesting about the chart was the 2x in the last month that the stock approached $44 and got rejected, my sense would be that the next bit of positive fundamental news could see a breakout to new 52 week highs.

[caption id="attachment_29766" align="aligncenter" width="589"]URBN 1 yr chart from Bloomberg URBN 1 yr chart from Bloomberg[/caption]

While the near-term chart looks fairly constructive, the longer term, 2 year shows just how important the $40 level is for the stock to hold.  The 2 year chart below shows that a meaningful break of one year support would cause a break of the uptrend that has been solidly in place for 2 years and could see the stock test the next real level of support at $35.

[caption id="attachment_29767" align="aligncenter" width="589"]URBN 2 year chart from Bloomberg URBN 2 year chart from Bloomberg[/caption]

Vol Snapshot:

Which leads me to Implied Volatility (blue line) in the name, 30 day at the money IV is very close to the 52 week lows, while realized volatility (white line)  saw a spike on the Aug 20th 6.69% earnings jump. Both Sept and Oct are historically low. And owning options for a breakout is a good do if that comes to pass.

[caption id="attachment_29768" align="aligncenter" width="589"]URBN 30 day at the money IV (blue) vs 30 day at the money realized vol (white) from Bloomberg URBN 30 day at the money IV (blue) vs 30 day at the money realized vol (white) from Bloomberg[/caption]

Near Term Catalysts:

First: URBN should release their 10-Q on or about Sept 10th, their last was filed on June 10th (here) where they offered guidance on Q2 comp store sales prior to the end of the qtr.

Second:  A C-level executive is slated to speak at Goldman Sachs’ Annual Global Retailing Conference on Sept 11th at 8am (here)

My View: If the company guides Q3 comp store sales above expectations, and a C-level exec gives an upbeat presentation at Goldman the same week, then these could be just the positive catalysts that would cause the stock to break out to new highs.  With implied volatility relatively low, and the fundamentals speaking to a break in either direction below $40 or above $45 on the next piece of news, a defined risk directional play with options seems liked the best way to express a positive near term view with the VERY murky macro backdrop.

Despite Sept options not really pricing much in for the 2 potential catalysts, outright call purchases do not look that attractive, either do vertical spreads.  There are 2 trades that we are considering to play for a bounce.

Trade 1:   URBN ($42.63 ) Buy Oct 42/45/48 Call Fly for .85

-Buy 1 Oct 42 call for 2.10

-Sell 2 Oct 45 calls at .75 each or 1.50 total

-Buy 1 Oct 48 call for .25

Break-Even on Oct Expiration:

Profits:  btwn 42.85 and 47.15 make up to 2.15, max gain of 2.15 at 45

Losses: btwn 42 and 42.85 lose up to .85 and btwn 47.15 and 48 lose up to .85 with max loss of .85 below 42 and above 48


Trade 2: URBN ($42.63) Buy Sept / Oct 44 Call Calendar for .60

-Sell 1 Sept 44 call at .55

-Buy 1 Oct 44 call for 1.15

Break-Even on Sept Expiration: Ideally we would like to see the stock make a move to 44 or a little above, at which point the Septs should lose most extrinsic value, while Oct should maintain most given the month of time value left in the options.  If the stock was little changed and the Sept expired worthless than we could decide to either spread Oct or close the position.

Comparison: Both trades have their strengths and weaknesses. The calendar is a play that says that 44 may be a little bit of resistance on a move higher and selling the Septs buys you time for the stock to break through in the next month and a half. The Fly is basically a similar bet from a bullish perspective but expressed in a different way, essentially buying the stock where it is and betting it will work its way to 45ish over the next month and a half.