Event: Macy’s (M) reports their Q2 results tomorrow before the open, the options market is implying about a 5% one day move which is rich the 4 qtr average of about 4%.
Price Action / Technicals: After recently making a new all time high in July following an activist investor suggested the company should consider a corporate structure that could unlock value from its real estate holdings, the stock has since pulled back and is now up about 2% on the year.[caption id="attachment_56050" align="aligncenter" width="600"] Macy’s 3 month chart from Bloomberg[/caption]
The two year chart below shows the stock holding the uptrend in a fairly meticulous manner:[caption id="attachment_56049" align="aligncenter" width="600"] Macy’s 2 year chart from Bloomberg[/caption]
Volatility Snapshot: 30 day at the money implied volatility is at 2015 highs, and quickly approaching 52 week highs:[caption id="attachment_56051" align="aligncenter" width="600"] Macy’s 1yr chart of 30 day at the money implied vol from Bloomberg[/caption]
Option prices are likely to say bid in the mid to high 20s prior to some sort of official response by the company about Starboard’s REIT suggestion.
Our View: The company has on a couple occasions this year lowered expectations for the full year, calling 2015 a “transitional” period as they invest technology, absorb the Mercury acquisition and address the challenges of a weak consumer. There was a time earlier in the year that U.S. retailers with little to no U.S. dollar exposure like Macy’s, Kohls (KSS), Dillards (DDS) and Nordstrom (JWN) were all perceived to be beneficiaries of a U.S. consumer who is paying less at the pump. All of these stocks are well off of their recent highs, while M & JWN on the higher end down the least from their 52 week highs. I suspect M would be acting much worse without the activist involved.
So how to play?
We think the way to play for those who see more upside later in the year once there is more clarity on the REIT conversion (if it in fact happens) would be to sell short dated calls to finance longer dated ones.
For those that think the stock could consolidate in the mid $60s near term, but activist pressure could push the stock to new highs in the fall, consider call calendars:
Hypothetical Trade: M ($67) Buy Sept / Nov 70 call calendar for $2.10
-Sell Sept 70 call at 1.35
-Buy Jan16 70 call for 3.45
Break-Even on Sept Expiration:
-Max profit at $70, max risk of $2.10 with a sharp move above $70 or below current levels.
Rationale: options prices are high for two reasons, investors are worried about recent retail sales data, and the potential for the company to explore a plan to unlock value from their real estate. There is a clear push and pull going on here. In the near term poor sales could weigh on the stock, while longer term the stock could set up for new highs. This trade structure helps finance the purchase of upside calls.
If the stock were to consolidate in the mid to high $60s then the trade could set up for a roll in the coming weeks, buying to cover the Sept 70 call and then selling a further upside call in Jan16 expiration.
We do not have a strong fundamental view on the stock and clearly no edge as the outcomes of the activist pressure, but calendars look interesting if we were inclined to play.
Estimates & Forecasts From Bloomberg:
2Q adj. EPS est. 76c (range 65c-80c)
2Q rev. est. $6.22b (range $6.05b-$6.3b)
2Q comp. sales est. +0.4% (Consensus Metrix, avg of 19)
Comp. sales incl. licensed departments est. +1.3%
FY16 adj. EPS est. $4.63; co. forecast $4.70-$4.80 (May 13)
FY16 rev. est. up 1% to $28.3b, co. forecast $28.4b (up 1%)
Macy’s forecast yr comp. sale on owned plus licensed basis of ~2%, with comp. sales slightly lower on owned basis