Under normal conditions, companies that post better-than-expected earnings results – especially when facing difficult circumstances – usually get rewarded with northbound investor sentiment. Unfortunately for department store giant Nordstrom (JWN), however, JWN stock tumbled, both during the open market session as well as the afterhours session. Moving forward, even contrarian speculators will want to think twice before gambling on the luxury retailer.
Outside of any other context, Nordstrom’s fiscal second quarter should have arguably led to a positive swing. According to the AP, the company delivered net income of $137 million or 84 cents per share. This figure beat Wall Street’s consensus target, which called for earnings per share of 45 cents. On the top line, the department store operator posted sales of $3.77 billion, also beating the consensus target, which came out to $3.67 billion.
Nevertheless, JWN stock slipped over 4% on Thursday. During post-close trading, shares declined by 0.42%. So, what was the negative catalyst? Despite the robust Q2 print, management stuck with its previous full-year outlook, which essentially signaled a cautious framework. Specifically, the leadership team expects revenue to fall 4% to 6% and adjusted EPS to come in between $1.80 and $2.20 for the fiscal year.
To be fair, retail sales in the U.S. increased by a better-than-expected 0.7% in July from June, as another AP report mentioned. While consumers have faced extraordinary pressures since the start of the COVID-19 pandemic, they continue to open their wallets. Certainly, some traders felt that JWN stock was worth speculating on.
At the same time, the pessimistic thesis comes down to simple math: at some point, without a substantive turnaround in the economy, consumer discretionary sentiment may dry up. And that would probably not serve Nordstrom well.
JWN Stock Presents a Contested But Ultimately Negative Options Environment
Unsurprisingly given the importance of Nordstrom’s Q2 print, JWN stock represented one of the top highlights in Barchart’s screener for unusual stock options volume. Specifically, total volume reached 65,127 contracts against an open interest reading of 149,301. Moreover, the delta between the Thursday session volume and the trailing one-month average metric came out to 566.12%.
Looking at the transactional breakdown, call volume came in at 28,553 contracts while put volume hit 36,574 contracts. This pairing yielded a put/call volume ratio of 1.28, which carries bearish overtones. Adding to the skepticism, JWN’s put/call open interest ratio stands at 1.25.
Now, just looking at the headline print can be deceptive. For example, traders can easily sell calls and puts, which basically reverses the underlying assumption of the said contracts. As well, the smart money can layer different products as part of a complex trading scheme.
However, when looking at Fintel’s options flow screener – which focuses on big block trades likely made by institutions – the near-expiry contracts appear to largely serve a bearish function. For instance, contracts that are expiring on Oct. 20, 2023 featuring strike prices between $17.50 to $25 are dominated by bearish transactions.
In addition, the most recent big block trades that occurred prior to Thursday’s closing bell were for put contract purchases; specifically, $14 and $16 puts with the same expiration date of Aug. 25 (Friday). Obviously, that’s not an encouraging circumstance.
Surely, not every institutional trader is pessimistic about JWN stock. Conspicuously, some traders have sold $15 puts (which is a neutral-to-bullish tactic) with an expiration date of Jan. 17, 2025. Even better, the premiums associated with these sold puts dwarf the premiums tied to the countervailing put purchases for the same expiration date.
However, the sold puts were transacted between May 31 and July 12. During this period, JWN stock rose from $15.30 to $20.04. Therefore, it made sense to sell puts because Nordstrom was looking great at the time.
However, just in the past five sessions, JWN stock fell nearly 11%. In other words, it’s possible that even the smart money is feeling the heat.
Outside Circumstances Don’t Bode Well for Nordstrom
Looking ahead to the next several months, Nordstrom’s fate will likely depend on the prevailing consumer sentiment. If people continue to defy expectations and splurge for discretionary items, JWN stock might be a contrarian’s dream. However, it’s also possible that households may be stretched to the limit.
One obvious concern centers on credit card debt, which recently exceeded the $1 trillion mark. While Americans have always gotten themselves in trouble with leveraging their grand lifestyles with plastic, this time may be different. With the Federal Reserve taking aim at inflation through higher interest rates, rising borrowing costs may eventually get the better of hurting households.
As well, companies continue to reduce their headcount amid burgeoning economic pressures. The latest example comes from T-Mobile (TMUS), which announced layoffs of around 5,000 people or nearly 7% of its workforce. Should more enterprises follow suit, consumers would logically curb their spending. If so, that’s bad news for JWN stock.
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.
