Dollar Tree Reported Earnings And You Won’t Want To Miss This Trade
Earnings season is winding down as retailers report their latest results. After this round of retailers, the volatility associated with earnings reports becomes more difficult for traders to find.
It’s not impossible to do. Traders just need to cast a wider net in those time periods falling between earnings seasons.
However, there are still a few more companies offering traders opportunities for companies reporting on their second quarter results. Among those opportunities is a familiar retail name as Benzinga reported,
Dollar Tree (Nasdaq: DLTR) reported second-quarter earnings of 76 cents per share, which missed the analyst consensus estimate of 81 cents by 6.17%. This is a 33.91% decrease over earnings of $1.15 per share from the same period last year.
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DLTR is the popular retailer that operates discount variety stores, approximately operated 14,330 stores in 48 states and the District of Columbia, and five Canadian provinces according to recent regulatory filings.
Its segments include Dollar Tree and Family Dollar. The Dollar Tree segment is the operator of discount variety stores offering merchandise at a fixed price.
The Family Dollar segment operates a chain of general merchandise retail discount stores providing consumers with a selection of merchandise in neighborhood stores. Its stores operate under the names of Dollar Tree, Family Dollar and Dollar Tree Canada.
The Dollar Tree segment included about 6,360 stores operating under the Dollar Tree and Dollar Tree Canada brands, 11 distribution centers in the United States and two in Canada and a Store Support Center in Chesapeake, Virginia, and 11 distribution centers and a Store Support Center in Matthews, North Carolina under the Family Dollar brand.
Benzinga continued, “The company reported quarterly sales of $5.74 billion, which beat the analyst consensus estimate of $5.71 billion by 0.53%. This is a 3.87% increase over sales of $5.526 billion the same period last year.
“The turnaround of the Family Dollar business continues to gain momentum. Family Dollar’s same-store sales increase of 2.4% was the third consecutive quarter of sequential acceleration and represented a 160 basis point improvement in the two-year stacked comp,” said CEO Gary Philbin.
“And, despite sales headwinds created by the global helium shortage, the Dollar Tree segment delivered a same-store sales increase of 2.4%, while cycling a strong 3.7% increase from the prior year’s quarter. Dollar Tree has now delivered 46 consecutive quarters of positive same-store sales, and eight consecutive quarters with two-year stacked comps exceeding 6%.”
This news could mark an important bottom in the stock.
A Trade for Short Term Bulls
As with the ownership of any stock, buying DLTR could require a significant amount of capital and exposes the investor to standard risks of owning a stock.
To reduce the risks of a trade, an investor could purchase a call option. This allows them to benefit from upside moves in the stock while limiting risk to the amount paid for the options. However, buying a call option can also require a significant amount of capital and includes the risk of a 100% loss.
Whenever an option is bought, the maximum risk is always equal to 100% of the amount of spent to purchase the option. Since options cost significantly less than a stock, the risk in dollar terms will usually be relatively small to own an option.
To further limit the risks of the trade, an investor could use a bull call spread. This strategy consists of buying one call option and selling another at a higher strike price to help pay for the cost of buying the first call. The spread strategy always reduces the risk of an options trade.
This strategy is designed to profit from a gain in the underlying stock’s price but has the benefit of avoiding the large up-front capital outlay and downside risk of outright stock ownership. The potential risks and rewards of this strategy are summarized in the chart below.
Source: The Options Industry Council
Both the potential profit and loss for the bull call spread are limited. The maximum loss is equal to the net premium paid when the trade is opened. The maximum profit is limited to the difference between the strike prices, less the debit paid to put on the position.
This strategy could be especially appealing with high priced stocks where the share price and options premiums are often a significant commitment of capital for smaller investors.
A Specific Trade for DLTR
Every day, we scan the markets looking for trades with low risk and high potential rewards. These trades are available almost every day and we share them with you as we find them. Now, it’s important to remember these are trading opportunities in volatile stocks.
When we find a potential opportunity, we evaluate it with real market data. But because the trades are volatile, the opportunities may differ by the time you read this. To help you evaluate the current opportunity, we show our math and explain the strategy.
For DLTR, the October 18 options allow a trader to gain exposure to the stock.
An October 18 $105 call option can be bought for about $2.55 and the October 18 $110 call could be sold for about $1.05. This trade would cost $1.50 to open, or $150 since each contract covers 100 shares of stock.
The amount paid to enter the trade is the largest possible loss on the trade. This is generally true whenever a trader is creating a debit to enter an options trade. “Creating a debit” means there is a cost to enter the trade. You could create a debit by simply buying puts or calls to open a directional trade.
In this trade, the maximum loss would be equal to the amount spent to open the trade, or $150.
The maximum gain on the trade is equal to the difference in exercise prices less the amount of the premium paid to open the trade.
For this trade in DLTR the maximum gain is $3.50 ($110 – $105= $5; $5 – $1.50 = $3.50). This represents $350 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $150 to open this trade.
That is a potential gain of about 133% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.