Black Friday is here.
Americans are expected to spend $966 billion today, $30 billion more than a year ago. According to estimates by the National Retail Federation, 130 million shoppers will be looking for deals. If you add online shopping, the number rises to 182 million, more than half of the US 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,” said NRF President and CEO Matthew Shay.
Black Friday isn’t what it once was, as retailers offer promotional prices at other times of the year, but it remains an essential day on retailers’ calendars.
Two popular retail brands exhibiting unusual pick 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 which are under contract. Abercrombie’s puts expire on December 1st, a week from today, while American Eagle’s puts expire two weeks later on December 15th.
This is what we are 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 offer
The first ANF put has an annual return of 120% and a net price paid of $71.30 if 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 in 2024. The biggest risk is any bad outcome from its Black Friday numbers released in the following days.
The second ANF put has an annual return of 89% and a net price of $70.75.
Lastly, the AEO put has an annual return of 64% and a net price of $15.81 if 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 has struggled to gain ground, only 4%.
That, in itself, tells the story of the two businesses. After covering why this performance difference occurred, I will return to the options.
Abercrombie Delivers the Goods in Q3
Abercrombie reported Q3 2023 results on Tuesday. If there is a recession in the works, economists should have told their clients.
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 per share on a non-GAAP basis, which is 55% better than expected and a marked 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 13% amid 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 regained everything.
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 projection of the analysts, while its earnings per share of $0.49 was one cent better than the consensus.
While the two companies’ earnings were similar, ANF outperformed 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 are not even within shouting distance of each other.
What killed AEO was lowering its Q4 2023 guidance for operating income. Amid 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 in the high single digits, well ahead of the 3.4% increase expected by analysts.
As we saw with the third quarter results, your stock price will fall if you miss 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 a great 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 has been CEO.
ANF stock ran long 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 options company. That’s because you have to want to own the stock if it were put to you at expiration, even if you’re looking for 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 needs 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. Afterwards, you will own an ANF share.
More Options News from Barchart
At 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 for informational purposes only. For more information, please see Barchart’s Disclosure Policy here.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.