Skip to main content

TJX Companies(TJX-N)
NYSE

Today's Change
Real-Time Last Update Last Sale Cboe BZX Real-Time

3 Retail Stocks: 2 Have Call Options Worth Buying 

Barchart - Fri Dec 2, 2022

According to data from several different retail industry participants, this year’s version of Black Friday was a mixed bag. 
Online sales rose 2.3% on Nov. 25, generating a record $9.12 billion. Meanwhile, brick-and-mortar stores in enclosed malls saw a 1.2% increase in sales, while strip malls and standalone locations rose 4.7%. According to Sensormatic Solutions, in-store visits were up 2.9% in 2022.

According to Adobe Analytics data, consumers are expected to spend 2.5% more for the entire holiday shopping season than last year. Holiday spending in 2020 and 2021 was up 32% and 8.6%, respectively.

Some retailers raked it on Black Friday and should continue to do so until Dec. 24. Others will see sales… and profits shrink as consumers get very selective about where they spend their money. 

A quick look at Thursday’s unusual options activity for retail companies provides me with three call options worth highlighting. Only two of them are worth buying.

TJX

I was with my wife this past week in one of TJX’s (TJX) Canadian Winners locations. The place was surprisingly busy on a night when it was storming outside. Consumers are looking for their dollars to go further this holiday shopping season. TJX’s various banners allow them to do that. 

I would be shocked if TJX didn’t report solid Q4 2022 results in February. 

In November, the company’s Q3 2022 results showed that its business was healthy, heading into its busiest time of the year. Overall revenue was down 2.9% to $12.17 billion, while its net income grew slightly, up 3.9%, to $1.06 billion. 

What stands out about the third quarter was the performance by Marmaxx, which is TJX’s T.J. Maxx, Marshalls, and Sierra stores in the U.S. Same-store sales were 3% higher year-over-year and 11% higher than Q3 2020 before Covid-19 took hold. 

Further, its HomeGoods business, which combines its U.S. HomeGoods and Homesense stores, saw its same-store sales fall 16% YOY, but they were up 34% over Q3 2020. 

As I said, the business is stronger than the top-line and bottom-line numbers might portray. How else would you explain its shares trading within a dollar of its all-time high?

Here’s what Barclays’ analyst Adrienne Yih had to say about its quarterly earnings:

“‘The third-quarter shows the power of the Off-Price model and that, in fact, the lack of e-commerce does not change the strength of the model itself,’ writes Barclays’ Adrienne Yih, who reiterated an Overweight rating and $66 price target on the shares today,” Barron’s reported the analysts’ comments.

I see TJX being one of the winners (no pun intended) this holiday season. 

The Jan. 20/2023 $82.50 call option had volume of 3,946 on Thursday, 3.34x the open interest. The $205 premium suggests its shares need to rise just 6% to break even over the next 49 days. 

I like its chances. TJX is a buy.

Dollar General 

Dollar General (DG) lost 7.6% of its value on Thursday when it reported its Q3 2022 results. It wasn’t the financials that caused the stock to fall, but rather its comments regarding its supply chain troubles—that spooked investors. 

“During the third quarter, the Company experienced unanticipated delays in acquiring additional temporary warehouse space sufficient for its inventory needs, which caused inefficiencies within the Company’s internal supply chain,” its Dec. 1 press release stated.

“These challenges resulted in higher-than-anticipated supply chain costs, including fees incurred for delays in returning shipping containers, and higher transportation costs caused by the need to service stores from less-than-optimal distribution center alignments.”

As a result, Dollar General lowered its guidance for full-year adjusted earnings per share growth from 13% YOY previously down to 7.5%. As one analyst said, it’s a rare misstep by an exceptionally well-run company. 

However, Loop Capital Managing Director Anthony Chukumba sees the decline as an excellent buying opportunity for investors. He believes that the troubles Dollar General’s facing are temporary. It should return to operating its business with the efficient style investors have become accustomed to. 

While the supply chain is giving it fits, the company’s same-store sales will be up 6.5% at the midpoint of its guidance in the fourth quarter. They were up 6.8% in Q3. For the entire year, same-store sales should be at the high end of its guidance of 4-4.5%.

The Feb. 17/2023 $260 call option had volume of 725 on Thursday, 5.07x the open interest. The $285 premium suggests its shares need to rise 9% to break even over the next 77 days. 

It’s got a real shot. This is hardly a business struggling to make sales. It will be fine.   

Wayfair

I have never understood the allure of ordering furniture online. My wife and I have ordered one item from Wayfair (W) over the years -- a set of metal kitchen chairs -- and even though they’re okay, it wasn’t enough to get us to buy anything else. We prefer to work with local craftspeople. 

Different strokes for different folks. 

However, from a business perspective, I always wondered how it could keep spending hundreds of millions of dollars on advertising and make money. Looking at past commentary from analysts over the years, the internet is littered with the same questions.

The pandemic ramped up its sales, leading to a $360 million operating profit, but that was on $14.1 billion in sales and an abysmally low $2.5% operating margin. Hardly a business built on a sound foundation.

Wayfair announced on Nov. 29 that it had strong sales in the five days between Thanksgiving and Cyber Monday. In the U.S., they were up in the low single digits YOY.

It didn’t say anything about its international sales in the press release. However, you know, if there were anything positive to report, it would have. 

In the first nine months of 2022 through Sept. 30, its international revenues were 31% lower YOY to $1.34 billion, with a $236 million EBITDA loss. 

The company's advertising costs in those nine months were $1.07 billion, $34 million higher, on $1.34 billion in lower revenue.      

Analysts are surprisingly lukewarm about Wayfair. Of the 24 that cover its stock, 11 have a Hold rating, with 4 Strong Buys and 7 Strong Sells.   

As for the call option in question, I’m looking at the Jan. 20/2023 $45 call option. It had volume of 1,596 on Thursday, 2.86x the open interest. The $470 premium suggests its shares need to rise 24% to break even over the next 49 days. 

Unless Wayfair pulls a rabbit out of its posterior, I do not see this as a smart bet for two reasons: First, it’s unlikely in this market to gain 24% in less than two months. Secondly, it’s not a stock you want to hold for the long haul. 

Caveat emptor. 


 



More Options News from BarchartOn 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.

Provided Content: Content provided by Barchart. The Globe and Mail was not involved, and material was not reviewed prior to publication.