“Cut-to-the-Chase” Recommendations
- Week Beginning -
Monday, May 21, 2018

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

Tuesday, May 22, 2018

** OPTION TRADE: Buy LB JUNE 15 2018 32.500 PUT at approximately $1.00 TO $1.10 each. Sell price is left to your own judgment.

(or alternatively : Place a pre-determined sell at $2.00.

Also include a protective stop loss of $0.40.)

L Brands Inc (NYSE:LB), a specialty retailer of women’s intimate and other apparel, beauty and personal care products and accessories, will report first-quarter fiscal 2018 results tomorrow, May 23, after the market closes. In the trailing four quarters, the company beat the Consensus Estimate by an average of 6.6%.The Consensus Estimate for first-quarter earnings, which has declined by a couple of cents in the past seven days, is pegged at 15 cents.

Shares of L Brands have declined 7.8% and underperformed the industry in the past six months. The stock further came under pressure after management projected first-quarter fiscal 2018 earnings to come in at the lower end of its earlier view of 15-20 cents a share.

L Brands is well known for its globally recognized Victoria’s Secret and Bath & Body Works brands. Its recent financial struggles over the last few years suggest that it has not reinvested enough capital back into the business, as the stock continues to slide despite an aggressive share repurchase program. Even with its somewhat generous yield, shares are not appropriately priced for the rather distressed nature of the company's financials and balance sheet -- shares have material downside to a fair value estimate of $18.46 per share.

Stock analysts at Piper Jaffray cut their Q1 2019 earnings per share estimates for L Brands in a research report issued to clients and investors on Thursday, May 10th. Piper Jaffray analyst E. Murphy now anticipates that the specialty retailer will earn $0.15 per share for the quarter, down from their previous estimate of $0.18. Piper Jaffray has a “Neutral” rating on the stock.

Influencing Factors

Shrinking gross margin remains a concern. The company had earlier forecast gross margin to contract in the first quarter. Gross margin, an important financial metric, has shown constant deceleration in the past few quarters. In the first, second, third and fourth quarters of fiscal 2017, adjusted gross margin contracted 320, 120, 190 and 100 basis points to 37.1%, 37.3%, 37.8% and 42.3%, respectively

The stock of L Brands (LB), the parent of Victoria Secret's and Bath & Body Works, was trading sharply lower after a disappointing April sales release.

The statement in the sales report that caused a drop in share price was:

“The merchandise margin rate [at victoria's secret] was down significantly to last year driven by additional promotional activity in order to drive traffic.”

Lower merchandise margins lead to lower gross margins, which forced the company to guide Q1 EPS at the lower end of the previous guidance of $0.15 to $0.20.

Month after month, Victoria's Secret continues to disappoint.

So far, VS Lingerie CEO Jan Singer has been incapable of turning that core business around and bringing it back to its glorious days.

Victoria’s Secret is the poster child for the dramatic negative effects e-commerce is having on brick-and-mortar retailers. Whereas digital direct channel sales have grown rapidly, store sales are seeing slower if not negative growth.

Furthermore, due to the promotional environment, even in spite of rising sales, operating income continues to drop.

Analysts and Hedge Funds Opinions

Due to poor April sales the following analysts actions were undertaken……

Loop Capital downgrades L Brands to Sell; with analyst Laurie Champine lamenting the Victoria Secret's business is ignoring the change all around it.

The assessment from Buckingham Research isn't much brighter. The analyst team calls L Brands "dead money" at the moment as it lowers its price target to $31.

Also, Loop Capital cut shares of L Brands from a hold rating to a sell rating in a report issued on Thursday, May 10th. The brokerage currently has $28.00 price objective on the specialty retailer’s stock.

As well, L Brands had its price objective lowered by Jefferies Group from $30.00 to $23.00 in a research report issued on Thursday, May 10th. The brokerage presently has an “underperform” rating on the specialty retailer’s stock. Jefferies Group’s price objective indicates a potential downside of 32.83% from the company’s current price.

Several other analysts have also recently commented on the company…..

  • Atlantic Securities lowered L Brands from an “overweight” rating to a “neutral” rating and lowered their target price for the stock from $63.10 to $30.70 in a report on Friday, May 11th.
  • MKM Partners lowered their target price on L Brands to $38.00 and set a “neutral” rating on the stock in a report on Friday, May 11th.
  • ValuEngine downgraded L Brands from a sell rating to a strong sell rating in a report on Wednesday, May 2nd.
  • Barclays restated a hold rating and set a $40.00 price target on shares of L Brands in a report on Monday, April 30th.
  • Royal Bank of Canada cut their price target on L Brands to $44.00 and set a buy rating on the stock in a report on Thursday, April 26th.
  • Credit Suisse Group cut their price target on L Brands from $45.00 to $38.00 and set a neutral rating on the stock in a report on Friday, April 13th.
  • Finally, Nomura cut their price target on L Brands to $37.00 and set a neutral rating on the stock in a report on Friday, April 13th.

Institutional investors that have recently made a change to their positions in the stock….

Lincoln National Corp trimmed its holdings in shares of L Brands by 52.8% during the first quarter. The firm owned 70,087 shares of the specialty retailer’s stock after selling 78,451 shares during the period. Lincoln National Corp’s holdings in L Brands were worth $2,678,000 at the end of the most recent reporting period.

Insider News……

  • CFO Stuart B. Burgdoerfer sold 17,000 shares of the stock in a transaction that occurred on Wednesday, March 21st. The stock was sold at an average price of $39.56, for a total transaction of $672,520.00.
  • Also, CFO Stuart B. Burgdoerfer sold 33,000 shares of the firm’s stock in a transaction that occurred on Tuesday, March 13th. The shares were sold at an average price of $42.53, for a total value of $1,403,490.00.

Summary

L Brands has a 1-year low of $30.70 and a 1-year high of $63.10. The company has a current ratio of 1.62, a quick ratio of 1.01 and a debt-to-equity ratio of -7.60. The firm has a market cap of $9.52 billion, a price-to-earnings ratio of 10.73, a PEG ratio of 0.98 and a beta of 0.77.

Option Trade - - Target Corporation (NYSE:TGT) Puts

Tuesday, May 22, 2018

** OPTION TRADE: Buy TGT JUNE 15 2018 75.000 PUT at approximately $1.50 TO $1.60 each. Sell price is left to your own judgment.

(or alternatively : Place a pre-determined sell at $3.00.

Also include a protective stop loss of $0.60.)

Target Corporation (NYSE:TGT), the operator of general merchandise stores, will report earnings tomorrow, Wednesday, May 23, 2018, before the market opens. The consensus earnings estimate is for $1.38 per share on revenue of $16.43 billion; however, Whisper number is for $1.41 per share. The company's guidance was for earnings of $1.25 to $1.45 per share. Consensus estimates are for year-over-year earnings growth of 14.05% with revenue increasing by 2.58%.

Overall earnings estimates have been revised lower since the company's last earnings release.

Target has had mostly good news to report on the operating front lately; such as beating management's upgraded sales growth guidance in the holiday quarter.

However, that expansion pace likely slowed at the start of 2018, as it has for other major retailers that have reported earnings recently, including Walmart (NYSE: WMT) and Home Depot. Furthermore, executives have warned that this fiscal year will show another decline in profitability as Target shifts toward a more digitally focused business.

Target's business isn't as seasonal as Home Depot's, but the retailer still likely had a sluggish start to the year.

Influencing Factors

Target is saving money right now by making its network of stores double as online fulfillment centers. But the digital sales channel is still soaking up resources, and that challenge is being compounded by the need for aggressive price cuts aimed at keeping sales growth humming along in the stores.

CEO Brian Cornell and his team have warned investors to expect operating earnings to decline again in 2018, but at a slower pace than last year's 8% slump. This will be a "transition year," they said in a recent conference call , as the company spends heavily on initiatives like store remodels, increased wages, and fulfillment upgrades aimed at speeding delivery from its physical locations.

Executives believe Target's shift toward a multichannel selling approach will hurt the business in the short term. The move will result in "somewhat lower operating margins than we've seen historically," Cornell explained in early March.

Margin, an important financial metric that gives an indication about the company's health, has been declining. Note that the operating margin shriveled 80 basis points (bps), 90 bps, 120 bps and 140 bps to 7.4%, 6.8%, 5.2% and 5.1% during the first, second, third and fourth quarter of fiscal 2017, respectively. Management expects operating margin to contract roughly 60-80 bps in the first quarter. Target informed that increase in depreciation and amortization on account of its remodel program, rise in costs due to new fulfillment options, higher wages and incremental investments are the primary headwinds.

Analysts and Hedge Funds Opinions

Wolfe Research raised Target from a “market perform” rating to an “outperform” rating in a research report on Wednesday, May 16th.

”Several other analysts have also recently commented on the company…..

  • Zacks Investment Research downgraded Target from a “buy” rating to a “hold” rating in a report on Tuesday, March 13th.
  • Cowen set an $80.00 price target on Target and gave the stock a “hold” rating in a research note on Thursday, February 8th.
  • Vetr lowered Target from a “hold” rating to a “sell” rating and set a $73.66 price target on the stock. in a research note on Thursday, February 15th.
  • Finally, Citigroup reissued a “neutral” rating and issued a $80.00 price target (down from $86.00) on shares of Target in a research note on Friday, February 16th.

One analyst has rated the stock with a sell rating, twelve have given a hold rating, nine have given a buy rating and one has given a strong buy rating to the stock. The stock presently has an average rating of “Hold” and a consensus target price of $74.37.

Institutional investors that have recently made a change to their positions in the stock….

  • Oppenheimer & Co. Inc. lessened its stake in Target Co. by 27.8% in the first quarter. The fund owned 43,524 shares of the retailer’s stock after selling 16,753 shares during the period. Oppenheimer & Co. Inc.’s holdings in Target were worth $3,022,000 at the end of the most recent reporting period.
  • Folger Nolan Fleming Douglas Capital Management Inc. decreased its position in Target Co. by 7.2% during the 1st quarter. The fund owned 10,199 shares of the retailer’s stock after selling 795 shares during the period. Folger Nolan Fleming Douglas Capital Management Inc.’s holdings in Target were worth $708,000 at the end of the most recent reporting period.

Insider News……

  • John J. Mulligan sold 118,373 shares of the company’s stock in a transaction on Tuesday, April 3rd. The stock was sold at an average price of $69.37, for a total transaction of $8,211,535.01. Following the completion of the sale, the insider now directly owns 195,906 shares in the company, valued at approximately $13,589,999.22.
  • Also, insider Don H. Liu sold 2,735 shares of the company’s stock in a transaction on Wednesday, May 16th. The stock was sold at an average price of $75.00, for a total value of $205,125.00. Following the sale, the insider now owns 62,210 shares of the company’s stock, valued at $4,665,750.

Summary

Profit margin fell last year, and management warned shareholders to expect further declines as e-commerce becomes a bigger part of the business.

Target has a market capitalization of $40.70 billion, a price-to-earnings ratio of 16.32, a PEG ratio of 2.74 and a beta of 0.71. Target Co. has a 52 week low of $48.56 and a 52 week high of $78.70. The company has a current ratio of 0.95, a quick ratio of 0.30 and a debt-to-equity ratio of 0.97.

Option Trade - - TJX Companies Inc. (The) (NYSE:TJX) Calls

Monday, May 21, 2018

** OPTION TRADE: Buy TJX JUNE 15 2018 87.500 CALL at approximately $1.25 TO $1.30 each. Sell price is left to your own judgment.

(or alternatively : Place a pre-determined sell at $2.50.

Also include a protective stop loss of $0.50.)

Specialty retailer TJX Companies Inc. (The) (NYSE:TJX), an off-price apparel and home fashions retailer in the United States and across the world, is scheduled to report its first-quarter numbers tomorrow, May 22, 2018, before the market opens. The consensus earnings estimate is $1.02 per share on revenue of $8.50 billion; but whisper number is $1.04 per share.

The company's guidance was for earnings of $1.00 to $1.02 per share. Consensus estimates are for year-over-year earnings growth of 24.39% with revenue increasing by 9.20%.

A strong overall economy with low unemployment is perfect for retailers, but what we have been seeing in recent months is that off-priced retailers such as TJX have been amongst one of the strongest brick-and-mortar retailers. TJX has managed to grow earnings by 8.0% per annum over the last five years and is expected to continue growing earnings by an average of 10.0% a year for the next five years.

The company posted mixed results last quarter, but a strong sales reading drove shares higher and the stock is currently sitting just shy of its all-time high.

Short interest has decreased by 8.2% and the overall earnings estimates have been revised higher since the company's last earnings release.

Influencing Factors

TJX Companies managed healthy sales growth in 2017, punctuated by accelerating gains over the critical holiday shopping period. Customer traffic was positive across its core TJ Maxx and Marshalls brands in the fourth quarter, leading to a 3% increase in comparable store sales, or sales at existing locations.

CEO Ernie Herrman and his team are targeting a 2% comps improvement in 2018, which would match last year's pace and keep steady with 1% to 2% increase that Ross Stores is expecting for the year. Executives said back in March that consolidation in the full price segment of the retailing industry is creating "abundant opportunities" for its buyers to pack its shelves with high quality merchandise.

Its off-price sales model produces consistent growth (revenue has ticked up at existing locations in each of the last 22 years) -- but also generates impressive earning power. TJX Companies' $2.6 billion of operating income last year drove a slight increase in bottom line profitability as net margin ticked up to 7.3% of sales from 7% a year ago. That put the retailer solidly ahead of full-price rivals like Target and Walmart.

Given the positive customer traffic trends, management saw room for a "significant" increase in growing its sales base back in March.

TJX Companies' generates plenty of cash each year, but that flow should be larger than normal in 2018. Tax law changes will boost net income, for example, while freeing the company to move at least $1 billion from its Canadian business into the U.S. segment.

Management is directing a large chunk of the resulting cash windfall toward the business through moves like higher wages, enhanced vacation benefits, and one-time bonuses. Investors stand to get significant increased returns, too, through a planned doubling of stock repurchase spending this year even as quarterly dividend payouts rise by 25%.

Analysts and Hedge Funds Opinions

Deutsche Bank assumed coverage on shares of TJX Companies in a research note on Monday, April 30th. They issued a “buy” rating and a $98.00 price target for the company.

”Several other analysts have also recently commented on the company…..

  • OTR Global initiated coverage on shares of TJX Companies in a report on Tuesday, May 8th. They issued a “positive” rating on the stock.
  • Cowen set a $92.00 price target on shares of TJX Companies and gave the company a “buy” rating in a report on Thursday, March 1st.
  • Loop Capital started coverage on shares of TJX Companies in a report on Thursday, March 8th. They issued a “hold” rating and an $84.00 target price on the stock.
  • Finally, BMO Capital Markets set a $94.00 price target on shares of TJX Companies and gave the stock a “buy” rating in a research report on Thursday, March 1st.

Six analysts have rated the stock with a hold rating and sixteen have given a buy rating to the company. The company currently has an average rating of “Buy” and a consensus price target of $94.75.

Institutional investors that have recently made a change to their positions in the stock….

  • Confluence Investment Management LLC grew its position in shares of TJX Companies by 0.6% during the 4th quarter. Confluence Investment Management LLC now owns 604,212 shares of the apparel and home fashions retailer’s stock valued at $46,198,000 after purchasing an additional 3,522 shares in the last quarter.
  • Capital Investment Services of America Inc. boosted its position in TJX Companies by 0.4% during the fourth quarter. Capital Investment Services of America Inc. now owns 184,330 shares of the apparel and home fashions retailer’s stock valued at $14,094,000 after buying an additional 685 shares during the period.
  • Finally, Atalanta Sosnoff Capital LLC bought a new position in shares of TJX Companies during the fourth quarter valued at about $30,013,000.
Summary

After trading near $87 in late April, TJX stock staged an orderly retreat to support in the $81 region - home to its 50-day moving average. With earnings set to arrive tomorrow, TJX stock bulls are moving back into the shares.

And earnings could add fuel to the fire. In fact, sentiment is rather bullish on TJX stock heading into the earnings confessional.

TJX Companies has a current ratio of 1.66, a quick ratio of 0.84 and a debt-to-equity ratio of 0.43. The firm has a market cap of $53.16 billion, a P/E ratio of 20.99, a PEG ratio of 1.70 and a beta of 0.66. TJX Companies has a 1 year low of $66.44 and a 1 year high of $87.31.