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Options investing: Playing the retail sector

Today's Financial News - Posted August 31, 2009

The nation’s retail sector is raising a lot of questions. Just about the only thing that is certain is prices won’t be anywhere close to current levels in just a few months. That makes a perfect trading opportunity for options investors.

By Andrew Snyder, TodaysFinancialNews.com

Baltimore – (TFN): I love a hometown success story. While it is hard to find much good news in the retail sector these days, one small-cap is proving consistency and experience pays off.

With the amount of competition larger than ever and margins dwindling by the day, running a department store is a tough business.

Earlier this year, investors were wondering if Bon-Ton (NASDAQ:BONT) was headed for bankruptcy court. With revenues plunging and a bottom line scribbled with nine figures of red ink, the chain’s cash pile could only carry it so long.

Over the last eighteen months, shares of the company plummeted from close to $60 to less than $6 late last year. As a resident of the small town Bon-Ton calls home, many local shoppers were wondering if we were witnessing the last days of a local brand.

But things are looking up for the company. With locations in 23 states and nameplates like Bergners, Boston Store, Carson Pirie Scott, Elder-Beerman, Herbergers, Younkers and of course Bon-Ton in their brand portfolio, the company was able to reduce its inventory, slash its overhead and move the company off the brink of collapse.

Signs of life

With a quarterly loss of $34.08 million, the company still needs help from eager consumers, but the bleeding has certainly slowed.

But the best news, the stuff that got share price surging in the right direction, is the company’s revised outlook. Instead of expecting a loss somewhere between $3.40 and $4.30 per share, the company now expects to lose just $2.50 to $3.70 per share.

The increased outlook comes to better-than-expected control of costs and inventory management, a common theme in the retail segment these days.

Of course, the news begs the question how long can the company survive in its current state? Unless consumers begin picking through the company’s racks sometime in the not-so-distant future, even a smaller-than-expected loss could still lead to doom.

It is an important question that is getting more and more attention as we get closer to third-quarter earnings results. Over the last few months, the equities market surged thanks to strong cost cutting. But now that every penny of extra spending has been cut, it is up to top-line growth to keep the markets moving forward.

A lot of responsibility

We are coming up on a critical period for the nation’s retailers. If this holiday season is a bust, disaster will almost certainly ensue.

For investors in need of low-risk plays, the retail industry is not the place to be, especially for the next six months. I’m afraid we have not seen the worst of the sector’s volatility.

But for options investors, Bon-Ton or many of the volatile stocks involved in the retail sector have plenty of potential.

If you are bullish on America’s spenders, Bon-Ton’s January calls look fairly appetizing, although I’d wait to make a move on any upcoming dips.

And if you are a bit more pessimistic, check out Bon-Ton’s shorter-dated options, as they have a significantly lower premium attached to them. October-dated contracts look about right.

When it comes to companies like Bon-Ton, especially the little ones, only one thing is certain. There share price won’t be anywhere close to today’s prices in six to nine months. There is going to be a significant move in one direction.

My indicators show things won’t be pretty this winter, but do your own due diligence and invest accordingly. There are plenty of great trades to be made.


Next Article: Best Buy announces expansion plans. HSC members are up 11%

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Posted by Andrew Snyder · Filed Under Featuring..., Options 

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2 Responses to “Options investing: Playing the retail sector”

  • jturner Says:
    August 31st, 2009 at 11:11 am

    In my opinion investing in gold related assets is a safer bet than any retailers given the large problems facing the consumer. The govt is intent on preventing deflation and has shown their ability to print vast sums of money to bail out and stimulate. But this comes with large consequences, such as the debasement of our currency. So the dollar will keep going down and the gold price should rise, as further discussed here: http://www.goldpriceblog.org . The inflationary implications of this are very big.

  • Mike Says:
    September 6th, 2009 at 6:00 am

    I still don’t think Bob Ton is out of the water yet. Its a very good possibility this recession will last into mid 2010….

Your comments are welcome