Sketchers Eyes $35 on Potential Earnings Breakout Rally
Trendy footwear firm Skechers U.S.A., Inc. (NYSE:SKX) will join the earnings parade on Wall Street this week. SKX stock is still down after the company issued disappointing guidance in its last quarterly report. However, Skechers has shown signs of life recently, and this week’s earnings report could be just the spark needed to send the shares soaring.
First, let’s address why SKX stock plunged following Skechers’ first-quarter earnings report. Specifically, the company warned of a “deceleration in sales due to a shift in the timing of shipments to key wholesale accounts,” as Cowen’s John Kernan said. In other words, the issue appears to be with distributor weakness, not with demand of Skechers shoes.
Now that this is a known factor, and Wall Street has had its knee-jerk moment to react, SKX stock should continue higher as a result. And the shares have done so during the past three months. In fact, since bottoming in early May, SKX stock has gained nearly 14% and reclaimed it’s 50-day trendline.
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The shares are now staring down resistance in the $32 region. This area is important, as it marks the site of Skechers’ post-earnings rejection on April 20. By breaking above this hurdle, SKX stock is putting April’s plunge behind it and moving on.
On the sentiment front, analysts are quite bullish on SKX stock. Specifically, Thomson/First Call reports that 10 of the 12 analysts following SKX rate the shares a “buy” or better. What’s more, SKX has received upgrades from hold to buy and strong buy in the past month.
As for earnings expectations. Wall Street is looking for a profit of 41 cents per share from Skechers, up from 38 cents in the year-ago period. Revenue is expected to rise 10% to $1.13 billion. EarningsWhispers.com puts the whisper number at 40 cents per share.
Turning to the options pits, July implieds are pricing in a potential post-earnings move of about 14% for SKX stock. This places the upper bound near $35.50, while the lower bound rests at $26.50.
2 Trades for SKX Stock
Call Spread: Traders looking to bet on a sharp post-earnings rally might want to consider a July $33/$34 bull call spread. At last check, this spread was offered at 15 cents, or $15 per pair of contracts. Breakeven lies at $33.15, while a maximum profit of 85 cents, or $85 per pair of contracts, is possible if SKX stock closes at or above $34 when August options expire.
Put Sell: For those traders bullish on SKX stock but concerned about a muted earnings reaction, a July put sell may be just the neutral path you are looking for. At last check, the July $26 put was bid at 40 cents, or $40 per pair of contracts.
As long as Lululemon stock trades above $26 through expiration, traders pursuing this strategy will keep the $111 premium. However, if LULU trades below $26 ahead of expiration, you could be assigned 100 shares for each contract sold at a price of $26 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
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