Based strictly on the afterhours share price movement of Ross Stores (ROST), contrarian investors may be tempted to jump aboard the off-price discount department store. True, pressures impacting the consumer economy – most notably from soaring inflation against historical standards – have hurt purchasing sentiment. At the same time, the bargain prices that Ross offers for events such as back-to-school may lift ROST stock.
Even more encouraging, Ross posted better-than-expected results for its fiscal second-quarter earnings report. According to the AP, the discount retailer posted net income of $446.3 million, translating to $1.32 per share. This figure beat Wall Street’s consensus earnings-per-share target of $1.17. On the top line, Ross rang up $4.93 billion in sales, also beating analysts’ estimate of $4.74 billion.
Further, management expects full-year earnings to land between $5.15 to $5.26 per share. Following the news, ROST stock – which had slipped almost 2% in the open market on Thursday – gained more than 5% in the afterhours session.
Should ROST hold its post-market gains, shares should be up modestly for the year. Is that enough to have confidence in the apparel retailer? It’s a complicated question.
Unusual Options Activity Jumps for ROST Stock
Not surprisingly given Ross Stores’ earnings disclosure and its pulse on the consumer economy, significant activity materialized in Barchart’s screener for unusual options volume. Specifically, total volume reached 24,116 contracts against an open interest reading of 64,065. Moreover, the delta between the Thursday session volume and the trailing one-month average metric came out to 594.99%.
Regarding the transactional breakdown, call volume hit 10,567 contracts while put volume took the edge at 13,549 contracts. This pairing yielded a put/call volume ratio of 1.28. It’s a somewhat similar profile to the put/call open interest ratio, which stands at 1.09.
To be sure, just the raw data alone is difficult to decipher. However, Fintel’s options flow data shows that for the Thursday session, bought puts via multi-sweep transactions – or orders that occur across multiple exchanges to fill large orders quickly – dominated the proceedings on Aug. 17. As well, multi-sweep bought puts dominated the Aug. 16 session.
Naturally, the rumblings in the derivatives market carries a bearish overtone. Nevertheless, the aforementioned Aug. 17 bought puts occurred as a pre-earnings event. That suggests the smart money anticipated Ross to stumble in fiscal Q2. Instead, it did quite the opposite.
So, should the doubters reverse their assessment? On the surface, it would seem a wise idea. First, the Barchart Technical Opinion indicator suggests ROST stock is a 72% strong buy. Second, Ross carries a strong buy consensus view among Wall Street analysts. This assessment breaks down as 13 strong buys, three holds and one strong sell.
If that wasn’t enough, the market experts’ high-side price target stands at $135, implying over 19% upside potential. Eventually, analysts will take into consideration the Q2 results, meaning that the overall price target could be upgraded.
Nevertheless, prospective investors may want to take a step back.
Why Did the Smart Money Bet Against Ross Stores?
Generally, following unusual options volume can be useful because the smart money tends to leverage the best resources and information. But at the end of the day, even the smartest, wealthiest folks are human. They make mistakes. Is that what happened with ROST stock?
Of course, based on a pejorative understanding of Occam’s razor, that might very well be the answer. However, I think a legitimate reason exists regarding anticipated bearishness for ROST stock and that is the underlying company’s slightly fading market share of the retail clothing and clothing accessories sector.
Juxtaposing retail apparel data with Ross Stores’ fiscal calendar, Ross accounted for 21.33% of the underlying market in fiscal Q4 2020. Thanks to the retail revenge phenomenon, Ross carried an average market share of 19.42% during FY 2021. However, in FY 2022, this metric slipped to 18.08%. Therefore, Ross must make a concerted effort to improve its standing in FY 2023.
However, the problem is its margins. In the company’s press release, Ross reported that operating margin came out flat to last year at 11.3%. That’s not exactly what many investors want to hear. In FY 2020 (right on the cusp of the COVID-19 crisis), operating margin stood at 13.38%. After a post-pandemic recovery to 12.33% in FY 2022, margins declined to 10.65% one year later.
Stated differently, Ross lacks the financial width it previously leveraged to sacrifice profitability for more market share. Therefore, while the latest Q2 print looks impressive, being a little bit skeptical may not be a bad idea. It’s just that the smart money may have been too quick on the timing.
On the date of publication, Josh Enomoto 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. For more information please view the Barchart Disclosure Policy here.
