ANF vs. AEO: Black Friday’s Unusual Options Activity Showdown

Will Ashworth - Barchart - Fri Nov 24, 2023

Black Friday is here.

Americans are expected to spend $966 billion today, $30 billion more than a year ago. According to estimates from the National Retail Federation, 130 million shoppers will be out and about looking for deals. If you add in online shopping, the number rises to 182 million, more than half the U.S. population.

“The Thanksgiving holiday weekend marks some of the busiest shopping days of the year, as consumers enjoy the tradition of shopping for the perfect gifts for friends and loved ones,” NRF President and CEO Matthew Shay said.

Black Friday isn’t what it once was, given retailers offer promotional pricing at other times of the year, but it remains an essential day on retailers’ calendars.

Two popular retail brands exhibiting unusual options activity on this busy shopping day are Abercrombie & Fitch (ANF) and American Eagle Outfitters (AEO).

Which is the better buy?

The Options in Focus

The two companies have three unusually active options today, all of them put contracts. Abercrombie’s puts expire on Dec. 1, a week from today, while American Eagle’s puts expire two weeks later on December 15.

Here’s what we’re looking at.

1) ANF Dec. 1 $73 put with $1.70 bid

2) ANF Dec. 1 $72 put with $1.25 bid

3) AEO Dec. 15 $16.50 with $0.60 bid

The first ANF put has an annualized yield of 120% and a net price paid of $71.30 should you sell the put and its owner makes you buy the stock in seven days. ANF stock is up 208% in 2023, making it a significant momentum play heading into 2024. The biggest risk is any poor result from its Black Friday numbers released in the next few days.

The second ANF put has an annualized yield of 89% and a net price of $70.75.

Lastly, the AEO put has an annualized yield of 64% and a net price of $15.81 should you sell the put and its owner makes you buy the stock in 21 days. AEO stock is up more than 13% YTD.

If you look at the one-year charts for both stocks, you’ll see that ANF took off in October 2022, up 205% over the past year, while AEO struggled to gain ground, up just 4%.

That, in itself, tells the story of the two businesses. After covering why this performance differential happened, I’ll get back to the options.

Abercrombie Delivers the Goods in Q3

Abercrombie reported Q3 2023 results Tuesday. If there's a recession in the works, economists should have told their customers.

Its revenue in the third quarter was $1.06 billion, $25 million higher than analyst expectations, and a 7.7% revenue beat. Same-store sales rose 16% year-over-year, 550 basis points higher than the consensus estimate, with a 26% increase from its Abercrombie brand.

On the bottom line, it earned $1.83 a share on a non-GAAP basis, which is 55% better than expected and a considerable improvement from a one-cent profit a year ago.

As a result of its strong performance, the company raised its full-year guidance for its sales growth and operating margin in 2023. It now expects sales to increase by 13% at the midpoint of its guidance to $4.18 billion. Its operating margin is expected to be 10%, up from its previous guidance of 8.5%.

Its shares lost ground on Tuesday but have since gotten it all back.

American Eagle’s Pessimistic Holiday Outlook

American Eagle also reported its Q3 2023 results on Tuesday. Its shares lost 16% on the news.

Like Abercrombie, AEO results were better than expected on both the top and bottom lines. Its revenue was $1.3 billion, $20 million higher than the analysts’ projection, while its earnings per share of $0.49 was one cent better than the consensus.

While the revenue beats of the two companies were similar, ANF blew past AEO relative to analyst estimates. It’s easy to see why. American Eagle’s gross margin in the quarter was 41.8%, 30 basis points less than the analyst estimate. Abercrombie’s was 64.9%, 570 basis points higher year-over-year. They’re not even within shouting distance of each other.

What killed AEO was lowering its Q4 2023 guidance for operating income. At the midpoint of its guidance, it expects operating income of $110 million, below the analyst estimate of $114 million. On the top line, it expects revenue to grow by high single digits, well ahead of the 3.4% increase from analysts.

As we’ve seen with third-quarter results, your share price will fall if you don’t hit analyst estimates, positive or not.

The Play to Make

There shouldn't be any question about which is the better business.

CEO Fran Horowitz has done an excellent job turning the business around since taking the top job in February 2017. Before that, she spent three years fixing both Hollister and Abercrombie. Its shares are up 480% since she’s been CEO.

ANF stock has run far in its move up into the $70s. Its current price-to-sales ratio is 0.99, 3x what it was in 2017 when Horowitz took over. ANF has never had such a high P/S ratio in the past decade.

However, you have to pay more for quality. Now, back to the puts.

When it comes to selling puts, I will always choose the better company regarding options. That's because you must want to own the stock should it be put to you at expiration, even if you’re after income rather than capital appreciation or a good entry point.

So, of the two puts, I’d be more inclined to go with the $72 put because it has to fall further over the next week to put you in the red. If it doesn’t, you pocket the $125 and repeat the process. Eventually, you’re going to own ANF stock.

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On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.