Christmas is Over: Moment of Truth for Retailers on the Way

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The holiday weeks are traditionally slow on Wall Street.  With Christmas and New Year's each claiming a trading day, and with company PR departments and trading desks depleted by vacations, very little substantive news is ever scheduled to come out in the final weeks of December.

Of course, while Wall Street gets sleepy during the holiday weeks, it is the busiest time of the year for retailers.  Staffs expanded by seasonal help, retailers feverishly try to serve manic crowds of shoppers - first those getting last minute gifts, and then those returning the gifts they got.

Because the fourth quarter is such an important one for the industry, and because the Christmas return season stretches a few weeks past the holiday, retailers typically end their fiscal years in January.  This means that rather than releasing financial results with the bulk of companies during Wall Street's quarterly reporting season, their figures come out about a month later.  While the peak of the next corporate earnings season will come in the second half of January, a large number of the biggest retailers won't report until the last couple weeks of February.

Meanwhile, investors will get a good deal of information about the sector over the next several weeks.  Industry groups will compile Christmas sales data and release their findings soon.

Some info has already started to come in.  The New York Post published a story the day after Christmas suggesting that holiday sales are likely to disappoint.  The article noted data from Discern Retail Insights, which showed that there was likely a small increase in consumer spending during the holiday season compared to last year. 

The report also included information from RS Metrics that suggested that traffic in mall parking lots was down in December compared to last year.  However, that might indicate that more purchases were made online this year.  Also, the RS Metrics data showed an increase in traffic for November, so the dip in December might include a shift to earlier shopping this year.

In October, the National Retail Federation predicted a relatively strong holiday season.  Their data suggested that we were likely to see a 3.6% rise in sales for November and December compared to last year. 

The government is scheduled to announce its next monthly retail sales report on January 13, covering figures for December.

Within the financial markets, there has been some signs lately of increased concern about retailers. 

Retailers in general, as measured by the XRT, the SPDR retail ETF, suffered a dip last week.  The XRT declined notably on Thursday and drifting further lower during Friday's pre-holiday session to end the week at $44.48, reaching a 6-week low.

Implied Volatility for the XRT reached a near-term peak of 23.9 on November 4, ahead of the earnings releases for many of the major industry players.  This was the highest level since June.  From there, IV fell off in the wake of the sector's earnings rush.  Lately, there has been a tick up, with IV advancing to 22.0, its highest level since early November's multi-month high.

The ATM Straddle premium for the XRT's 17-Mar-17 expiration, which would include the major earnings reports in the sector, currently stands at $3.62, or 8.1%.

Looking to individual players in the sector, Wal-Mart ($WMT) is scheduled to release its quarterly results on February 21.

Implied Volatility for WMT reached a near-term peak ahead of its last earnings release, touching 24.8 on November 4.  This marked its highest level since May.

In its last earnings report, Wal-Mart revealed a quarterly profit that dropped more than 8 percent from last year, though the bottom line beat expectations and the company raised its forecast for the full year.  WMT's shares fell on the news, though quickly recovered and has been in a range recently.  The ATM Straddle premium for the 17-Mar-16 expiration, which would include the Q4 earnings report, is $5.09, or 7.3%.

Target ($TGT) will likely report earnings around the same time as Wal-Mart.  Target has similarly seen a tick up in its Implied Volatility, though the measure was coming off a 3-month low and remains well off the multi-month high it reached in early November.  The rise in IV came amid a dip in TGT's shares last week, along with the rest of the sector.  This retreat took TGT to a multi-week low.  For the expiration of 21-Apr-17, Target has an ATM Straddle premium of $7.58, or 10.3%.

Macy's ($M) is another major retailer that will report earnings around February 21.  The stock reached a closing high of $44.91 in late November, but has been losing ground steadily since.  It is now sitting at $36.48.  Meanwhile, Implied Volatility has been rising over the same period, though it remains below the level it reached before its last earnings release.  IV is now sitting at 39.9 compared to 49.5 level on November 4.  The 19-May-17 expiration for M has an ATM Straddle premium of $6.76, or 18.5%.

While many of the major retailers will release their earnings in February, at least one major player is due out before that: Amazon ($AMZN).  The online retailer is expected to report in late January.  Implied Volatility for AMZN is holding at subdued levels, keeping to a narrow range since the last earnings release.  The stock price has shown similar movement.  Shares reached a multi-year high in early October, but came off that peak over the next six weeks.  Since then, shares have held to a narrow range.  The ATM Straddle premium for 3-Feb-17 expiration is $66.59, or 8.8%.

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