Foot Locker (NYSE: FL), the Manhattan-based footwear (and sportswear) retailer, has underperformed the broader market so far in 2013, having advanced less than ten percent in 2013. In the process of matching the performance of your average hedge fund, shares of Foot Locker have thus far been resilient despite a lack of (the past two earnings calls have seen the stock slide 7 and 5 percent). Scheduled to report earnings on Friday before the market open, and recently the analyst tone has shifted to one of concern: early this month, Goldman Sachs downgraded Foot Locker based on what it perceived as ‘slowing demand’ for athletic brands.
While Foot Locker’s chart doesn’t look as bad as that of certain other retailers – as recently as July it traded at an all-time high upward of $37/share – it’s not great either. Trading below all the moving averages – the 20, 50, and 200 are 35.76, 35.63, and 34.35, respectively – the stock price recently crossed below the 10-day moving average (34.97) as well. From a technical perspective, this is usually considered to be a very bearish indicator in the near-term.
Foot Locker, which currently operates over 3,000 stores in 23 countries, is more subject to the whims of fickle consumers since they primarily offer athletic shoes. While a fair portion of their customer base may purchases these shoes to go to the gym or run a 5k, a greater portion is likely to consist of those simply looking for street wear – sneaker heads and urban fashionistas. This puts the company in the difficult position of being subject to the ebb and flow of what is ‘trendy.’ At the same time, share’s aren’t necessarily expensive – trading at $34.01 with a $5.13 billion market cap and a P/E of ration of 12. This is significantly better than besought rival Dick’s Sporting Goods (NYSE: DKS), whose P/E is 20. Coincidentally, DKS shares are down nearly 5 percent this morning following their pre-market earnings call.
Another key metric for any brick and mortar business – and Foot Locker is no exception – is same-store sales growth. On the Q1 call the company revised guidance, calling for a decline in same store sales growth. On that same call, they announced a $600 billion share repurchase program, helping the stock in its run to $37.
The near-term, at-the-money straddle in Foot Locker is implying an 8.1% move in the stock between now and September expiration (no weekly options are offered in FL). Monday also saw huge bearish unusual option activity, with a trader buying 1800 of the FL Sept 33 Puts for $0.95. I decided to take the same trade.
MY TRADE
Buy the FL Sept 33 Puts for $0.95
Risk: $95 per 1 Lot
Reward: Unlimited
Break-even: $32.05
GREEKS OF THIS TRADE
Delta: Short
Gamma: Long
Theta: Short
Vega: Long
This trade also provides nice opportunity for a spread, with the FL Sept 31 Puts trading around $0.35, a trader could sell these contracts, reduce their risk exposure, but still get close to 3:1 on their money.
