Bulls Ready to Run but Retail Clipped, Urban Calls Likely Expire Worthless

The bulls certainly took the market by its horns last week. Friday marked fifth straight green close which brought most averages almost 11% above the lows of December 24. Retail stocks, however, took a blow due to an unexpected warning by Macy’s (NYSE: M).

Although the actual Macy’s guide is not draconian, it’s clear that investors thought the stock valuation already incorporated all the bad news. Most of our retail names recovered somewhat from the widespread selling, but Urban (NSDQ: URBN) will not be high enough to recover any of our trade in the January calls, which expire this Friday.

There is no action required on your part; the calls will simply expire at a value of zero.

Unfortunately, options are perishable items. If the price of the stock is not above or below the respective call or put strike price at the date of expiration, the options expire without any value. The loss of capital is a real and sizeable risk associated with buying options and should be taken into consideration when determining the size of a position.

We’ve got a busy week ahead, so I’ll go straight to the news. As an aside, we do not have any portfolio companies reporting earnings this week, but several will present at the ICR consumer conference, an event which tends to move stocks.

In addition, earnings reports will begin in volume at the end of January and will continue throughout February.

Around the Portfolio:

BJ Wholesale Club (NYSE: BJ) does not report monthly sales like its peer Costco (NSDQ: COST) but will present at the ICR conference this week. I don’t expect any negative surprises. Costco reported a better than expected December comp, but the stock did not respond much.

Both stocks should find some support in the fact that SNAP payments (food stamps) will not pause due to the government shutdown. In fact, February payments will be made several weeks early. This surprise influx might boost January sales, albeit at the cost of February.

Chemours (NYSE: CC) was initiated with a Buy at HSBC Securities and a price target of $52. This upgrade follows an upgrade by Citi last week and hopefully is a harbinger of better performance for the stock.

Steven Madden (NSDQ: SHOO)  not made any announcements regarding sales but will present at ICR this week. The date is not disclosed.

Tapestry (NYSE: TPR) was upgraded to Overweight from Equal Weight at Barclays and a price target of $47.

Target (NYSE: TGT) reported November/December comps +5.7% and reaffirmed its fourth quarter and annual EPS guidance. The results reflected strong traffic, positive store comps and comparable digital sales growth of 29 percent. Target expects that 2018 will be the fifth consecutive year in which its digital sales grow more than 25 percent. It reaffirmed guidance for FY19 of $5.30-5.50 vs. $5.40 S&P Capital IQ Consensus.

Also, it announced that Chief Financial Officer Cathy Smith would be retiring from the Company. Smith will continue in her role as Chief Financial Officer until her successor is named and then move to an advisory role until May 2020 to ensure a smooth transition.

Despite what I considered a solid December sales report, Urban did not catch the bid I expected. Various analysts weighed in with their opinion:

Telsey Advisory Group reiterated Market Perform rating but lowered its target to $37 from $42. The firm believes the 5% holiday comp result is also consistent with the quarter-to-date mid-single-digit comp growth reported in the company’s 10-Q filing on December 10. However, the January comp becomes significantly more difficult, as URBN reported 4% growth for the full 4Q18 period (following the 2% increase in November and December). Looking to 2019, ongoing investments in digital selling and marketing expenses may continue to weigh on profitability, while the benefits of store reorganization efforts and tax reform begin to anniversary.

Wolfe Research reiterated its Outperform rating and $42target. The firm notes the holiday comp of +5% was good but not great as the firm had hoped. The firm believes that Urban Outfitter’s brand comp was capped by full-price selling. This is good news for merchandise margins. The Anthropologie Home category missed but was offset by reduced clearance units. The Free People brand had unexpected modest margin pressure. Although more difficult 1H18 comp compares may embolden short sellers, spring is one of the strongest product seasons for all three brands. With strong brand equity, differentiated product, and a model that mitigates fixed-cost deleverage, the firm supports URBN shares at these levels.

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