Wednesday Morning Rebel Brief: Target, Lowe’s, and TJ Maxx Earnings

The indices are lower this morning in premarket trading, likely on the back of a huge earnings miss in Target, and some concerning information about rising costs eating into the bottom-line of certain businesses. Let’s look at what happened to Target, Lowe’s, and TJ Maxx as they reported earnings, and the unusual option activity that preceded it. 

Target ($TGT) Misses the Target Amid Rising Freight Costs

Target missed EPS by -28.7% (reporting $2.19 adjusted EPS vs $3.07 expected) but beat on revenue by 2.8% (reporting $25.17B vs $24.49B expected). The stock is down more than 24% in premarket trading on the EPS miss.

CEO Brian Cornell joined CNBC this morning to share his thoughts on what made this quarter so difficult.  

“I frame it by looking at the front of the house of our business, and then the back of the house. If you think about the front of the house, the consumer and guest-facing component, we saw really strong comps — over three percent, on top of 23% last year. And importantly it was driven by traffic. Traffic up 4%, on top of 17% last year. Guests are shopping in our stores, they’re enjoying our services, they’re using drive-up. 

But clearly, the challenge for us this quarter was the back of the house. From a freight and transportation standpoint, things have changed significantly from 13 weeks ago. We did not project the kind of significant increases we would see in freight and transportation costs. Right now, we project that it’s going to hit us about a billion dollars in incremental costs in this fiscal year. A significant increase that we didn’t anticipate.”

This was similar to the outlook that Walmart gave yesterday, where high costs weighed on the bottom line, resulting in $WMT’s biggest one-day loss since 1987 (11.4%).

Target is one of the larger names inside the SPDR S&P Retail ETF ($XRT), which tracks 109 retail stocks. Likely due to Target and Walmart’s warning about rising back-end costs, the ETF is down a whopping 4.25% in premarket trading. Market Rebellion’s Heat Seeker identified massive bearish activity yesterday morning in the ETF — $1.24 million dollars of out-of-the-money put options bought for next month.

As of this morning, that “smart money” purchase is already paying off. 

Lowe’s ($LOW) Sees Lower Revenue Than Expected

Lowe’s beat EPS by 10% (reporting $3.51 vs $3.22 expected), but missed slightly on revenue by -0.4% (reporting $23.66B vs $23.76B expected). The stock is down by more than 4% in premarket trading.

Though Lowe’s didn’t really miss its revenue by a substantial amount, the stock is likely trading lower as a result of a comparison between itself and Home Depot. Home Depot reported earnings yesterday, and surprised the street with its strongest first-quarter sales on record, raising its guidance accordingly. 

Investors were likely hoping similar from Lowe’s today. One explanation for why that didn’t happen is that a substantial portion of Lowe’s sales comes from DIY consumers (75%-80%) — a much higher share than Home Depot. That means that Lowe’s is more exposed to the ebbs and flows of consumer sentiment. As a result, Lowe’s reiterated its full-year outlook of sales between $97B-$99B. 

Market Rebellion’s Heat Seeker recently identified three separate bearish option purchases in this name while the stock was trading between $197.85 and $203.87. 

Currently, in premarket trading, Lowe’s is down to 185.26, representing a big win for these bearish “smart money” buyers.

TJ Maxx ($TJX) Reports a Mixed Quarter

TJ Maxx beat EPS by 13.3% ($0.68 vs $0.60 expected) but missed on revenue by -1.7% ($11.41B vs $11.60B expected). $TJX is trading higher by more than 4% in the premarket.

While a minor revenue miss might have been enough to send Lowe’s lower, it was likely the massive profit-margin growth (+54.5% for the year) that allowed $TJX to trade higher this morning. Revenue also grew by 13.1% for the year. 

TJ Maxx is one of Pete Najarian’s favorite retail stocks, and he’s even gone as far as calling himself a “Maxxinista”. As of 5/9, Pete is long calls in this name.

The Bottom Line

Traders shouldn’t fear earnings events, or stock declines. As Market Rebellion’s Chief Options Strategist Ryan Mastro often says, “There’s just as much opportunity to make money on the downside as there is on the upside!” With the velocity of these downside moves, traders could have used options to capitalize in a wide variety of ways. 

An at-the-money $215 straddle in Target, for instance, would have cost traders $1,338 at last night’s close. If $TGT’s price remains where it is in premarket ($162.80 at the time of writing), that straddle will likely be worth more than $5,000 at open — not bad for a night’s work.

Traders could have also followed the “smart money” and used $XRT puts as a proxy trade for Target’s earnings. They could have bought puts in Lowe’s as well, which the “smart money” had been particularly bearish on recently. 

No matter how you slice it, the institutions have information that individual traders just don’t have. Curious what they’re buying now? Check out Unusual Options Activity Essential. Get “smart money” trade ideas like these delivered straight to your inbox every week, and level the Wall Street playing field.