We will keep this simple, bricks and mortar department stores in the U.S. don’t have a bright future. Yeah in some way shape or form we will still have them as showrooms. But survival depends on completely rethinking their business model to compete with the long tail inventory and ease of internet retail. In the meantime we will see far fewer brands and locations than we have now and we will likely see a heightened period of consolidation sooner rather than later. 2017 will likely see mergers and greater investment into an omni-channel approach to compete with the likes of Amazon.
Macy’s (M) saw its sales top out in f2105 at $28.1 billion. dropped a billion to $27.1 in f2016 and is expected to print just under $26 billion in current year f2017. A consolidation wave may be a positive thing for shares of M, given their retail assets, brand value and valuation (to peers, market and its history), but near term the stock’s 43% rise from its 52 week and 5 year lows in May might discount whatever good news (if any) comes out of a heavily discounted holiday selling season.
Shares of M were just rejected at 52 week highs from March, which also represents a gap fill from November 2015:[caption id="attachment_68486" align="aligncenter" width="600"] M 2yr chart from Bloomberg[/caption]
The next identifiable catalyst for M won’t be until their fQ4 results in late February, but there should be no shortage of commentary and hints regarding the holiday selling season between now and then that might affect the stock.
Short dated options prices are above their 52 week lows but much lower than recent spikes. 30 day at the money implied volatility has made two higher lows since the 52 week lows made in early April:[caption id="attachment_68487" align="aligncenter" width="600"] M 1yr chart of 30 day at the money implied volatility from Bloomberg[/caption]
As we head into the end of the year, following a sharp rally over the last couple weeks, we could see a period of stock consolidation, but the stock just had trouble establishing a new 2016 high and could retest its recent earnings gap level.
So What’s the Trade?
We’ll probably start to see indications of a heavily discounted Holiday shopping season for bricks and mortar retailers like Macy’s before the calendar turns. That, combined with the rally from the lows means M could revisit 40 or lower into the New Year.
*M ($43) Buy the Jan 42.5/37.5/32.50 put butterfly for $1.10
- Buy 1 Jan 42.5 put for $2
- Sell 2 Jan 37.5 put at .50 each or $1 total
- Buy 1 Jan 32.50 put for 10 cents
Break-even on Jan Expiration:
Profits: between 41.40 and 33.60 of up to 3.90 with max gain of 3.90 at 37.50
Losses: up to 1.10 between 41.40 and 42.50 & between 32.50 and 33.60 with max loss of 1.10 below 32.50 and above 42.50
Rationale – If Macy’s stabilizes, the recent high is a good stop to use on the upside where losses on the trade would be manageable at less than 2.5% of the underlying stock price. But if the stock is does fail then a break below $40 could be in the cards in the next 7 weeks. The butterfly helps to offset some potential decay between the Christmas holiday and New Years as we will have an additional 2 trading days off for the holidays in what could be low volatilize trading. The guts of the butterfly is set at recent support and at the converged 50 day and 200 day moving averages. This trade offers a good risk reward for a pullback to that support level after the recent move higher.