Earnings Edge: A Tale of Two Retailers

Earnings Edge: A Tale of Two Retailers

The first three months of the year are expected to be a turning point for corporations.

While the companies that make up the S&P 500 turned the fourth quarter of 2020 into positive earnings growth fueled by strong U.S. consumerism, the biggest jump is expected in the first quarter of 2021.

As we get ready to see companies report earnings for the first quarter of the year, estimates are pointing to a huge earnings growth rate of 21%.

The stock market is a forward-looking indicator. That means it is already pricing this growth in for the first quarter.

But, when we get the actual results, earnings can set up investors for disappointment or confirm that the economy continues to rebound.

That’s why these two key earnings reports we are looking at today are critical to kick off the first-quarter earnings season.

It isn’t about whether these earnings are better or worse than expected, but about how they say things are going now. Both companies are reporting for November, December and January — a very busy holiday shopping period.

Most S&P 500 companies have already reported earnings for October, November and December. And the results were impressive.

Now we get a glimpse at how things are carrying over into 2021.

Today, we’ll be looking at Nike Inc. (NYSE: NKE), the apparel retailer, and Five Below Inc. (Nasdaq: FIVE), a discount retail chain.

A Tale of Two Retailers

Earnings Edge Stock No. 1: Five Below Inc. (Nasdaq: FIVE)

Earnings Announcement Date: March 17, after the close.

Expectations: Earnings at $2.11 per share. Revenue at $839 million.

Average Analyst Rating: Outperform.

Five Below is a discount brick-and-mortar retailer that benefited from a ramp up in its online presence, but not enough to stave off a slump from the pandemic. With 1,000 stores closed across the country, it had to rely on innovation. And it paid off. The company‘s last earnings release in December reflected this, with strong demand in stores and increased online revenue.

But this was just as the economy was opening back up in August 2020 through October. As a result, sales increased 26% from the same period a year ago, in a normal economic environment. This past earnings season showed consumers came out strong at the end of 2020.

We get to see if that carried over into 2021 or if there is a sharp drop off after the holiday period. We want to see the consumer demand stay elevated throughout 2021, and this will be our first glimpse from a retail level.

Looking back, the quarter Five Below is announcing this week has been the strongest due to holiday shopping. It’s interesting to see that investors are cautious after the sharp rally.

Five Below Is Trading Sideways

Five Below earnings stock chart

The stock has been bouncing around a wide trend channel, with the red line being resistance and the green line being support. The bigger trend here is the dotted green line, clearly showing the stock is in an uptrend.

But, the fact shares haven’t risen steadily since the last earnings report tells you investors are nervous — they know the stock raced higher on expected good news in the last six months of 2020. Now it’s time to deliver on that good news.

The options market is looking for a 4.7% move on earnings. With the stock in the middle of the two key trends to watch, it’s going to take a move of more than 5% to hit the resistance or support levels. So I’m looking for a bigger move than 4.7% on earnings this week.

Earnings Edge Stock No. 2: Nike Inc. (NYSE: NKE)

Earnings Announcement Date: March 18, after the close.

Expectations: Earnings at $0.74 per share. Revenue at $10.9 billion.

Nike is a wildly popular consumer apparel brand. Its branding is on everything from shoes, clothes, and sports apparel. It has grown into a leading retail brand in the athletic industry. While it is a different niche than Five Below, both rely heavily on the U.S. consumer.

Consumers are finally flocking back to mall outlets and retail stores. In December, Nike said that more than 90% of its stores were officially opened. Digital sales jumped 84% to boost revenue for its last quarter. Now we have seen the economy normalize even more, and that will boost results this week.

The key is those January results, though. And the commentary on what Nike has seen to this point in March.

That’s the tale of how the consumer is doing after the holiday spending surge.

Shares have rebounded since the pandemic, but the stock is trending lower in 2021.

Nike Stock’s Downward Trend

Nike earnings stock chart

The red resistance line and solid green trend line are slightly sloping downward. With the stock back near the high of this trend channel, the risk is a drop after earnings. But you can see the dotted green line shows the overall trend for the stock is still to head higher.

Shares peaked in January and have bounced around since then as investors wonder how much of this bullish momentum is flowing into 2021.

With the trend heading higher overall, I wouldn’t bet against Nike.

Options traders are only looking for a 3% move in the stock. Given the swings shares have seen lately, rising 10% and falling 10% in just a week or two, it could easily move more than 3% on earnings. The question is, which direction will it go.

And for that, my crystal ball doesn’t have the answer.

One thing I wouldn’t do is bet against any company that benefits from consumer demand. With more stimulus checks on the way, some as soon as this week, it’s more cash consumers will have to spend at places like Nike and Five Below.

So instead of gambling on earnings, I track companies after they report earnings. That’s when a phenomenon known as the earnings drift develops and carries the stock on a trajectory we can profit from. I recently put together a presentation explaining everything about it. Click here to learn more.

Chad Shoop is a Chartered Market Technician and options expert for Banyan Hill Publishing. He is the editor of three leading newsletters: Quick Hit Profits, Automatic Profits Alert and Pure Income. His content is frequently published on Investopedia and Seeking Alpha. Check out his YouTube Channel to see his latest market insights.

Click here to join his free newsletter, Weekly Options Corner.

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