Event: GPS reports their fiscal Q2 earnings on August 22nd after the close. The options market is implying about a 4.25% one day move, which is well above both the 4 qtr avg of about 2.75% and the 8 qtr avg of about 2.6%.
Sentiment: Wall Street analysts are quite mixed on the stock, with 13 Buys, 19 Holds and 2 Sells, though the 12 month price target is around $48. Short interest is around a 5 year low, at only 2% of float.
Options Open Interest: Open interest is evenly split between calls and puts, and the volume over the last month slightly skews towards calls by a ratio of 1.25 to 1. evenly split between calls and puts. Nearby strikes with the most open interest include the Sept 44 and 45 calls.
Price Action / Technicals: Gap more than tripled from its lows in 2011 near $15, quite a run over the course of 2 years. The 200 day moving average has hardly been breached except for a brief stint earlier this year. But the uptrend has been clear:
In the short-term the important level of $42.50 is marked in green. That served as resistance in May and June and has acted as support in the past month. More important long-term support comes into play around $40. The high for the year is at $46.56.
Fundamentals: Despite Gap’s enormous gains over the last 2 years, the stock’s valuation is still on the cheap end of the spectrum compared to most retailers. A 10 year chart of Gap’s 12 month trailing P/E multiple shows that the current multiple is in the middle of its 10 year range:
The major driver of the stock’s substantial appreciation in 2013 has simply been exceptional earnings and revenue results. Gap has clearly won market share from its competitors, with the particular renaissance of Old Navy in the U.S. Comparable sales for GPS have been in the +5-10% range in the past 6 months, while many retailers (ANF, AEO, ARO) actually had negative comparable sales in Q2 2013.
The results from the retail sector have been poor over the last 2 weeks, on both the high end (M) and the low end (WMT), and anywhere in between (JWN, AEO). But if Gap continues its strong outperformance, then the stock is still cheap at current levels.
Volatility: Gap realized volatility has been quite low over the past month, though that masks the huge year to date move that the stock has made, since it was a gradual grind higher throughout 2013. So while close-t0-close volatility looks low, options are pricing in higher volatility going forward, though not too elevated relative to prior earnings events:
The implied move looks higher than normal because realized volatility has been so low that implied volatility across all maturities for GPS is lower than it has been over the past 2 years.
Trades: Stay tuned for our thoughts on potential trade structures that we’ll be posting this week ahead of the event.