“Cut-to-the-Chase” Recommendations
- Week Beginning -
Monday, February 20, 2017

by Ian Harvey

IMPORTANT NOTE: There is no stop-loss or pre-determined sell price recommended – this is left to the discretion of the individual trader.


Option Trade – L Brands Inc (NYSE:LB) Puts

Wednesday, February 22, 2017

** OPTION TRADE: Buy the LB MARCH 17 2017 55.000 put at approximately $0.75. Sell price is left to your own judgment.

L Brands Inc (NYSE:LB), a specialty retailer of women’s intimate and other apparel, beauty and personal care products and accessories,) is slated to report its fourth-quarter and fiscal 2016 results today, after the market closes. The firm’s management recently lowered its earnings outlook for the holiday quarter, foreseeing earnings per share to come in at $1.90, in line with the consensus estimate and representing an 11% decline year over year (YOY). Analysts predict sales growth of 2.7% over the same period last year to $4.51 billion in the most recent quarter.

L Brand shares, trading at a price of $57.71 on Tuesday afternoon reflect an approximate 31% decline YOY. Heightened competition in the retail space coupled with the firm’s exit of the swimwear market may weigh on earnings, placing the stock at risk of a steeper plummet.

Influencing Factors to Consider               

L Brands has exhibited a bearish run in the past six months plunging roughly 26.2% compared with the Retail-Apparel/Shoe industry that declined 15.7%. The company's January comps slid 4%, following a 1% dip in December and an increase of 4% in Nov 2016. Net sales fell 1% for the month of January. However, the company reported flat comps and recorded sales growth of 2% for fourth-quarter fiscal 2016.

Further, it now expects earnings to be approximately $1.90 per share compared with prior guidance for the low end of its initial projection of $1.85–$2.00.

The company now foresees short-term challenges on account of its decision to exit the swimwear category, which according to analysts have failed to generate desired results. For the fourth quarter, the exit of the swim and apparel categories had an adverse impact of 2% and 4% to total company and Victoria’s Secret comparable sales, respectively.

Further, the competitive retail landscape, the aggressive promotional strategies undertaken to gain market share may weigh upon the company’s margins in the quarter to be reported. Moreover, foreign currency headwinds may play spoilsport.

Over the trailing year, the stock is underperforming the S&P 500 by -50.39%, and it’s gotten there by action that has been less volatile on a day-to-day basis than most other stocks on the exchange. The stock’s recent movement has come on a historical volatility score of 21.10%, which represents the standard deviation of returns of a theoretical long position from a mean price during that period. On a daily basis over the past month, the average true range of the stock, as expressed in percentage terms, is 2.5%.

Analysts and Hedge Funds Opinions

Artemis Investment Management LLP cut its stake in shares of L Brands, Inc. by 55.9% during the fourth quarter, according to its most recent filing with the SEC.

L Brands, Inc. has been given an average rating of “Hold” by the thirty-one research firms that are currently covering the stock. Three research analysts have rated the stock with a sell recommendation, fifteen have issued a hold recommendation, eleven have given a buy recommendation and one has assigned a strong buy recommendation to the company. The average 1-year price objective among analysts that have updated their coverage on the stock in the last year is $71.94.

Summary

LB has been trading in a bearish trend, based on the relative levels of its 50-day and 200-day simple moving averages. This suggests that the broad sum of capital flow in the stock has been generally negative over the recent period.

L Brands, Inc. has a market capitalization of $17.02 billion, a price-to-earnings ratio of 14.98 and a beta of 0.83. The company has a 50-day moving average of $63.91 and a 200 day moving average of $70.27. L Brands, Inc. has a 52 week low of $57.48 and a 52 week high of $93.00.


Option Trade – Jack in the Box Inc. (NASDAQ:JACK) Calls

Tuesday, February 21, 2017

** OPTION TRADE: Buy the JACK MARCH 17 2017 115.000 call at approximately $1.20. Sell price is left to your own judgment.

Based in San Diego, CA , Jack in the Box Inc. (NASDAQ: JACK), operates and franchises Jack in the Box restaurants, one of the nation’s largest hamburger chains, with more than 2,200 restaurants in 21 states and Guam, and Qdoba Mexican Grill, a fast-casual dining chain, with more than 600 restaurants in 47 states, the District of Columbia and Canada, will release its Q117 earnings data on Wednesday, February 22nd, after the market closes. Analysts expect Jack in the Box to post earnings of $1.25 per share and revenue of $499.40 million for the quarter, which represents a rise of 6.0% from $470.8 million. Revenue growth is expected to be driven by SSSG (same-store sales growth) and unit growth of both Jack in the Box and Qdoba Mexican Eats.

In 4Q16, JACK had better-than-expected earnings. Its initiatives to improve the quality of its menu items and the initial performance of its Brunchfast menu, launched in September 2016, appear to have increased investor confidence. As a result, JACK stock rose.

As of February 16, 2017, JACK stock was trading at $109.13, which represents a rise of 7.5% since the announcement of its fiscal 4Q16 earnings on November 21, 2016.

It was a tough year in 2016 for restaurants due to higher labor wages and the gap between the rising cost of eating out and the falling prices at grocery stores. In spite of these factors, JACK rose 48.7% in 2016.

The company has had a strong performance in the last three quarters. Donald Trump’s presidential victory could also have something to do with JACK’s rising stock price. Investors expect Trump to loosen regulations, which could benefit restaurant chains.

Investment analysts at SunTrust Banks issued their Q1 2018 earnings per share estimates for shares of Jack in the Box in a report released on Friday. SunTrust Banks analyst J. Bartlett forecasts that the firm will post earnings of $1.58 per share for the quarter. SunTrust Banks currently has a “Buy” rating and a $122.00 price target on the stock. SunTrust Banks also issued estimates for Jack in the Box’s Q2 2018 earnings at $1.37 EPS, Q3 2018 earnings at $1.45 EPS and Q4 2018 earnings at $1.37 EPS.

Influencing Factors to Consider               

Jack in the Box's same-store sales have been consistently outperforming the industry over the past several quarters. Particularly, the company's Qdoba brand has been witnessing comps growth on the back of menu innovation. It is expected that the trend will continue in the fiscal first quarter.

Meanwhile, increased marketing and remodeling efforts, along with investments in technology-driven initiatives should drive top-line growth. Moreover, the company is currently focusing deeply on catering sales and its breakfast menu. These are expected to boost its sales in the to-be-reported quarter.

In fact, for the fiscal first quarter, the company expects comps growth at the Jack in the Box restaurants in the range of 2-4% compared with the year-ago comps growth of 1.4%. For the Qdoba restaurants, same-store sales are projected to be flat to up 1% compared with the year-ago quarter comps growth of 1.5%.

In fiscal 1Q17, analysts are expecting JACK to post EPS of $1.24, which represents a rise of 31.7% from $0.94 in fiscal 1Q16. EPS growth is expected to be driven by revenue growth, expansion of EBIT margins, and stock repurchases in the last 12 months.

From the beginning of fiscal 2Q16 to the end of fiscal 4Q16, JACK has repurchased approximately 2.6 million shares worth $192.0 million. By the end of fiscal 4Q16, the company had $408.2 million in its share repurchase program. Share repurchases reduce the number of shares outstanding, thus boosting the company’s EPS.

The company’s management has set an EPS guidance of $4.55–$4.75 for fiscal 2017. Analysts are expecting the company to post EPS of $4.70, which is a rise of 19.4% from $3.94 in fiscal 2016. EPS growth is expected to be driven by revenue growth, expansion of margins, and share repurchases in the last 12 months.

In fiscal 1Q17, SG&A expenses are expected to fall from 14.0% to 11.8% due to the consolidation of its information and technological systems. Analysts are also expecting D&A expenses to fall from 6.1% to 5.8% of its total revenue.

Analysts are expecting JACK to post an EBIT margin of 17.0% in fiscal 2017 compared to 14.9% in fiscal 2016. The refranchising of 70 restaurants and lower commodity and SG&A expenses are expected to expand JACK’s margins in fiscal 2017.

Analysts and Hedge Funds Opinions

Victory Capital Management Inc. boosted its position in shares of Jack in the Box by 58,757.7% in the third quarter. Victory Capital Management Inc. now owns 620,949 shares of the company’s stock valued at $59,573,000 after buying an additional 619,894 shares during the last quarter.

Robert W. Baird reiterated an “outperform” rating on shares of Jack in the Box in a research note last Thursday.

Two analysts have rated the stock with a sell rating, four have issued a hold rating and eleven have assigned a buy rating to the stock. The company presently has an average rating of “Buy” and a consensus price target of $125.23.

Summary

Expect the company to surpass expectations.

Last quarter, Jack in the Box posted a positive earnings surprise of 17.05%. In fact, the company surpassed earnings estimates in three of the past four quarters, with an average beat of 12.94%.

Jack In The Box Inc. has a market capitalization of $3.47 billion, a price-to-earnings ratio of 29.55 and a beta of 0.55. The firm has a 50-day moving average of $108.46 and a 200 day moving average of $102.22. Jack In The Box Inc. has a 12-month low of $61.78 and a 12-month high of $113.30.


Option Trade – Foot Locker, Inc. (NYSE:FL) Calls

Tuesday, February 21, 2017

** OPTION TRADE: Buy the FL MARCH 17 2017 75.000 call at approximately $0.90. Sell price is left to your own judgment.

Foot Locker, Inc. (NYSE:FL), a retailer of shoes and apparel, is slated to release fourth-quarter fiscal 2016 results on Feb 24. The current Consensus Estimate for the quarter under review is $1.31, reflecting a year-over-year increase of over 12%. However, the Consensus Estimate has increased by a penny in the past seven days. Analysts expect revenues of $2,116 million, up about 5.4% from the year-ago quarter.

In the trailing four quarters, the company outperformed the Consensus Estimate by an average of 2%.

The most recent quarter was the 27th record breaking quarter for them, and they seem to do a very good job of managing inventory, since sales rose 5% while inventory only grew by 1.9%. Also, their direct to consumer channel is showing strong growth of 8.9%, which reduces the potentially negative impact of the Amazon effect.

The company continues to show strength in a number of their categories, particularly in the women's and children's footwear categories.

Guggenheim Securities Chief Executive Dick Johnson believes that the ongoing questions about mall traffic and assumptions about Foot Locker’s inability to continue to produce healthy operational results have provided an attractive entry point on the shares for long-term investors.

They upgraded Foot Locker to Buy from Neutral, and increased their 2018 EPS estimate to $5.75 from $5.70 and establishing an $85 price target, based on 15 times their new 2018 EPS estimate.

Guggenheim upgraded the shares for four main reasons:

  • 1. shares are down 14% from 52-week highs versus the S&P 500/S&P Retail Index (RLX) down about 1%;
  • 2. they believe ongoing concerns on mall traffic are overblown as it relates to Foot Locker as it has demonstrated a lack of dependence and proved to be a standout destination in a rough neighborhood;
  • 3. at current levels shares are trading at a 12% discount to its three-year average two-year forward price/earnings multiple and trading at a double-digit discount on a relative valuation to the S&P 500; and
  • 4. while concerns linger around the slowdown at Under Armour (UAA), Foot Locker’s merchandising prowess positions it well to continue to utilize numerous vendors to deliver impressive results.

Influencing Factors to Consider               

Foot Locker's stellar performance is backed by effective implementation of operational and financial initiatives. It is believed that the company is likely to gain by constantly utilizing opportunities like kids' and women's business, shop-in-shop expansion in collaboration with its vendors, store banner.com business, store refurbishment and enhancement of assortments.

Further, the company is focusing on augmenting eCommerce platform, growing direct-to-consumer operations, margin expansion and tapping underpenetrated markets.

Foot Locker will continue to be a top wholesale partner for Nike (NKE), Adidas, Under Armour and Puma, among others, driving continued mid-single-digit comparable-store sales/high-single-digit to low-double-digit EPS growth.

Foot Locker’s diverse portfolio of banners, globally, as well as its “House of Brand’s” approach provides insulation from a choppy North American retail environment (about 70% of sales in U.S.).

Foot Locker has an ability to generate ongoing positive traffic in its U.S. mall operations, and it is believed that Foot Locker banners remain a top mall-based destination.

The athletic footwear category has demonstrated pricing power, when the right price/value is presented.

Additionally, a return to growth in Nike Basketball in the coming quarters should facilitate ongoing comp performance at Foot Locker.

The financial performance has been quite consistent and predictable at Foot Locker. They have grown sales at a reasonable clip of just over 6% CAGR and have grown earnings at about 20% CAGR since 2010. At the same time, they have paid down debt consistently, suggesting that there is little risk of a liquidity crisis at the firm.

Analysts and Hedge Funds Opinions

Tyvor Capital LLC bought a new stake in shares of Foot Locker, Inc. during the fourth quarter, according to its most recent disclosure with the Securities and Exchange Commission. The firm bought 131,415 shares of the company’s stock, valued at approximately $9,316,000. Foot Locker accounts for 3.8% of Tyvor Capital LLC’s investment portfolio, making the stock its 12th largest position. Tyvor Capital LLC owned approximately 0.10% of Foot Locker at the end of the most recent reporting period.

Canaccord Genuity reissued a “buy” rating and issued an $83.00 price objective (up from $79.00) on shares of Foot Locker in a research note on Monday, December 5th.

Foot Locker has received an average rating of “Buy” from the twenty-three research firms that are currently covering the stock. One investment analyst has rated the stock with a sell rating, five have issued a hold rating, sixteen have assigned a buy rating and one has assigned a strong buy rating to the company. The average 1 year price target among analysts that have covered the stock in the last year is $76.37.

Summary

The company has demonstrated its ability to diversify in what has been a softer basketball environment over the prior few quarters. With momentum at Adidas and Puma after several successful launches, the company has numerous opportunities to continue to diversify its product offering.

Foot Locker, Inc. has a 1-year low of $50.90 and a 1-year high of $79.43. The firm’s 50 day moving average is $69.94 and its 200 day moving average is $68.78. The firm has a market cap of $9.40 billion, a price-to-earnings ratio of 15.33 and a beta of 0.57.




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