Earnings Preview – ANF Shirtless

by Dan May 27, 2015 2:28 pm • Commentary

Event: Tomorrow before the open Abercrombie & Fitch (ANF) will report their Q1 results. The options market is implying about a 10% one day move, which is a bit rich to the 4 qtr avg move of about 7.5% and the 8 qtr avg of about 8.4%.  

Sentiment:  Wall Street analysts HATE the stock with only 7 Buy ratings, 19 Holds and 10 Sells.  Investors are not far behind this point of view with short interest about 35% of the float.

Price Action / Technicals:  ANF is down 30% on the year, and 56% from the 52 week highs made in September.  The one year chart below shows the stock once again approaching the post earnings low from their Q4 disaster:

[caption id="attachment_53992" align="aligncenter" width="600"]ANF 1yr chart from Bloomberg ANF 1yr chart from Bloomberg[/caption]

Longer term a break of $20 would place the next line of support somewhere in the mid to high teens back towards the seven year lows during the financial crisis:

[caption id="attachment_53993" align="aligncenter" width="600"]ANF 20 year chart from Bloomberg ANF 20 year chart from Bloomberg[/caption]

Volatility Snapshot:  Implied volatility (the price of options) is not as high as it was prior to the company’s last report which is likely a function of the fact that realized volatility (how much the stock has been moving) is at the lows of 2015:

[caption id="attachment_53994" align="aligncenter" width="600"]ANF 1yr chart of 30 day at the money IV (blue) vs 30 day realized vol (white) from Bloomberg ANF 1yr chart of 30 day at the money IV (blue) vs 30 day realized vol (white) from Bloomberg[/caption]

MY VIEW:  I suppose it would be really hard to take the other side of sentiment on this one, as there have been no shortage of disasters in retail in this earnings season.  Most notably KORS down 23% today after it was also at 52 week lows (it was already down 40% from its 52 week highs heading into the print).  Investors appear to be bracing for an implosion.  Consensus is calling for a 6% sales decline in fiscal 2016, and a 42% decline in earnings.

While going long seems just a tad too contrarian into the print, pressing the short could prove disastrous on the slightest bit of unexpected good news.

Potential Trades:  For those with a directional inclination, we think the following trades offer a better risk reward than long or short stock:

Bullish: ANF ($19.95) Buy to Open July 20 call for 1.23

-Break-even at $21.23, up 6% on upside.

Rationale: With an implied move of 10%, and a stock like KORS down 23% today it makes sense to define your risk on a contrarian play.  While vol is sure to get killed after the event, if the stock has reason to go up it will probably look to re-test the March break-down level of $24 in the coming days.


Bearish: Frankly I can’t find any that make sense. Short premium trades are the way to go, but most short dated spread look to dollar cheap to sell despite high iv.

Frankly, I don’t like the set up in either direction, especially from a long period standpoint, but if already long prefer near the money calls than long stock.