Troubles Continue at This Once High-Flying Retailer
Fashion is a notoriously difficult business with consumer tastes changing and potentially changing the fortunes of a company or a stock rather quickly. The Street recently reported on one such shift that could be underway,
“Capri Holdings Ltd (NYSE: CPRI) shares were [moving] lower [after] after the luxury goods brand formerly known as Michael Kors slashed its current quarter outlook thanks to costs linked to its $2 billion acquisition of Versace.
Capri said earnings for the three months ending in March, its fiscal fourth quarter, came in at 63 cents per share, flat from last year but 2 cents ahead of the Street consensus forecast. Group sales, Capri said, rose 13.8% to $1.344 billion and again topped analysts’ estimates.
The group said its 2018 purchase of Versace, however, would trim first quarter earnings by around 15 cents a share as it opens new stores and ramps-up its marketing expense, and issued a fresh forecast of between 85 cents and 90 cents for its fiscal first quarter.
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Sales of $1.36 billion for the three months ending in June also missed the Refinitiv forecast.
“Looking ahead, Fiscal 2020 will be an investment year for our group, and we believe our initiatives will deliver strong revenue growth for Capri Holdings.
Longer term, our three brands position Capri Holdings to accelerate revenue from $6 billion to $8 billion dollars, which will be led by Versace and Jimmy Choo, with Michael Kors remaining a strong foundation for Capri Holdings,” said CEO John Idol.
“We expect to grow Versace from $900 million to $2 billion dollars in revenue, expand Jimmy Choo from nearly $600 million to $1 billion in revenue, while building Michael Kors from $4.5 billion to $5.0 billion in revenue.”
“Taken together, we believe our three iconic, founder-led fashion brands position Capri Holdings to deliver multiple years of earnings growth.” Idol added.”
Traders sold on the news and the price move retraced all of the stock’s gains since the beginning of 2019.
The long term chart adds to the case for the bears. The stock has sold off sharply with a steep decline at the end of last year. CPRI failed to participate in the recovery and is far from its previous highs. The recent decline could bring more sellers into the market, further weighing on the stock price.
A Trading Strategy To Benefit From Weakness
A price decline often results in higher than average options premiums. That means option buyers will be forced to pay higher than average prices for trades, But, sellers could benefit from the higher premiums.
In this case, with a bearish outlook for the short term, a call option should be sold. The call should decline in value if the stock declines and sellers of calls benefit from this decline.
Selling options can involve a great deal of risk. A spread options strategy can be used to limit the potential risk of the trade.
One strategy that traders can consider is the bear call spread. This is a trade that uses two calls with the same expiration date but different exercise prices.
Traders buy one call and sell another call. The exercise price of the call you sell will be below the exercise price of the long call. The call is sold to limit the risk of the trade. So, this strategy will always generate a credit when it is opened and will always have limited risk.
The risk profile of this trading strategy is summarized in the diagram below which shows the limited risk and reward.
Source: The Options Industry Council
While risks and rewards are limited, this strategy will allow traders to generate potential gains in a stock they might otherwise find too risky to trade. Many individuals ignore bearish strategies because of the risks.
You’ll know the maximum potential gain with this strategy as soon as it’s opened. It is equal to the amount of premium received when the trade is opened. The maximum loss is equal to the difference between the exercise price of the options contracts less the premium received and is also known.
Every day, we scan the markets looking for trades that carry 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.
A Bear Call Spread in CPRI
For CPRI, we could sell a June 21 $35 call for about $1.40 and buy a June 21 $37.50 call for about $0.49. This trade generates a credit of $0.91, which is the difference in the amount of premium for the call that is sold and the call.
Remember that each contract covers 100 shares, opening this position results in immediate income of $91. The credit received when the trade is opened, $91 in this case, is also the maximum potential profit on the trade.
The maximum risk on the trade is about $159. The risk can be found by subtracting the difference in the strike prices ($250 or $2.50 times 100 since each contract covers 100 shares) and then subtracting the premium received ($91).
This trade offers a potential return of about 57% of the amount risked for a holding period that is relatively brief. This is a significant return on the amount of money at risk. This trade delivers the maximum gain if CPRI is below $35 when the options expire, a likely event given the stock’s trend.
Call spreads can be used to generate high returns on small amounts of capital several times a year, offering larger percentage gains for small investors willing to accept the risks of this strategy. Those risks, in dollar terms are relatively small, about $159 for this trade in CPRI.