Costco (COST) FQ2 Preview / Trade Ideas

by Dan March 7, 2019 12:14 pm • Trade Ideas

Costco (COST), the big box retailer will report fiscal Q2 earnings tonight after the close. The options market is implying about a 3.25% move in either direction by tomorrow’s close, which is above its ten-year average one-day post-earnings move of about 2.2%, and the 3.75% average over the last four quarters (all lower).  With the stock at $217.50, the March 8th weekly at the money straddle (the call premium + the put premium is offered at about $7. If you bought that, and thus the implied move for earnings, you would need a rally above $224.50, or a decline below $210.50 to make money by tomorrow’s close.

Shares of COST saw a peak to trough decline from its September all-time-highs to its Christmas lows of 22.5% but has since rebounded about 15% in line with the broad market, but mildly underperforming the 18% rebound in the XRT, the equal weight etf that tracks the retail sector.

With the stock trading at $217.50, it is at the exact mid-point of the 6-month range of $245 in Sept to $190 in December. This level is also a very big level from a technical perspective as it was support on numerous occasions in the fall, and was the where it broke down from to the tune of nearly 9% the day after reporting disappointing fiscal Q1 earnings in December:


Shares of COST trade at about 28x expected 2019 eps growth of 9% on 8% expected sales growth, which seems kind of rich in the current environment and especially after witnessing Kroger’s (KR) 10% decline today following their big earnings miss, per CNBC:

Kroger’s earnings took a hit as it closes out the first of three-year investment plan that pours money into digital sales and delivery services to keep up with shifting consumer shopping habits. The company’s gas stations also suffered from a drop in gas prices that cut sharply into revenue.

Digital sales jumped 58 percent during fiscal 2018, and the company said it expanded its pickup or delivery programs to reach 91 percent of its customers — all part of its strategy to compete with Walmart and Amazon. During the fourth quarter, the company opened more warehouses for the division.

While we have seen some sharp bounces by retailers like Target (TGT), Kohls (KSS) and Dollar Tree (DLTR) this week, I suspect COST will be much more sensitive to competitive pressures in the grocery business as opposed to the off-price retailers.

So what’s the trade? If I were inclined to play for a disappointment I would look to next week’s regular Dec expiration and buy put spreads… for instance…

Bearish Trade Idea: COST ($217.50) Buy March 217.50 – 202.50 Put Spread for $3.50

-Buy to open 1 March 217.50 put for $4.10

-Sell to open 1 March 202.50 put at 60 cents

Break-even on March expiration (next Friday):

Profits of up to 11.50 between 214 and 202.50 with max gain of 11.50 at 202.50 or lower.

Losses of up to 3.50 between 214 and 217.50 with max loss of 3.50 at 217.50 or higher

Rationale: this trade idea risks 1.6% of the stock price for six trading days that include a potentially volatile event that the options market suggests could move the stock 3.25% in either direction tomorrow alone.

I’ll offer my usual disclaimer about long premium directional trades into events like earnings, you need to get a lot of things right to merely break even, first and foremost you have to get the direction right, timing and the magnitude of the move,


Or If I were inclined to play for a breakout above resistance at $220, then I might consider a call spread targeting a move back towards $240 in the next couple months, for instance…

Bullish Trade Idea: COST ($217.50) Buy May 220 – 240 call spread for $5.80

-Buy to open 1 May 220 call for $7.05

-Sell to open 1 May 240 call at $1.25

Break-even on May expiration:

Profits of up to 14.20 between 225.80 and 240 with max gain of 14.20 above 240

Losses of up to 5.80 between 220 and 225.80 with max loss of 5.80 below 220

Rationale: this trade idea risks 2.7% of the stock price for a little more than 2 months with max profit potential of 6.5%