Gap Inc. (GPS:US) options traders are the most bullish in a decade, betting the biggest U.S. apparel chain will keep climbing after reaching a 10-year high.
The number of outstanding calls (GPS:US) to buy the San Francisco- based retailer versus puts to sell rose to 2.55-to-1 and touched 2.71-to-1 on March 26, the highest level since October 2001, according to data compiled by Bloomberg. Gap’s shares reached $26.87 on March 26, the highest price since August 2001, and gained 41 percent this year through yesterday.
Investors are betting Gap’s report on monthly same-store sales, scheduled for April 5, will lift its stock for the third straight time. U.S. retail sales rose in February by the most in five months, consumer confidence is approaching a four-year high and record cotton crops are exceeding demand by the most in more than two decades, bringing down prices for clothes sellers. Analysts raised their full-year profit projections by 4 percent since the end of January.
“February was a big surprise when they announced the positive comp, and indications so far for March look pretty good,” Connor Browne, who oversees more than $3 billion as co- manager of the Thornburg Value Fund in Santa Fe, New Mexico, said in a phone interview yesterday. Thornburg owned (GPS:US) 10.6 million shares of Gap at year-end, Bloomberg data show. “We’re additionally excited about the possibility of higher margins in the back half of this year on lower cotton prices.”
Gap posted the second-biggest rally (GPS:US) among the 32 members of the S&P 500 Retailing Index since the index’s low on Oct. 3. Analysts increased their earnings-per-share forecasts for the company’s fiscal year to $1.82, according to the average projection compiled by Bloomberg.
The stock has increased this year as consumer confidence reached the second-highest level in four years last week as more Americans said it was a good time to shop, according to the Bloomberg Consumer Comfort Index showed yesterday.
This month’s comparable-store sales for the Gap brand are projected to rise by 4.4 percent, according to analysts surveyed by Retail Metrics Inc. Shares of the retailer advanced after the last two same-store sales releases, jumping 11 percent on Feb. 2, the most since November 2008, and advancing 7.2 percent on March 1, as the results beat estimates.
Record Cotton Crops
Record cotton crops from India to Brazil are driving prices lower, helping bring down input costs for retailers. Gap is “fairly confident that average unit costs will improve in the second half,” the company’s Chief Financial Officer Sabrina Simmons said on a Feb. 23 conference call.
Moody’s Investors Service boosted its outlook on the U.S. apparel industry to positive from stable on March 29 based on lower cotton costs, according to a report from the ratings company. Operating income is likely to rise as much as 8 percent this year, with the strongest growth in the second half, from a previous forecast of as low as 3 percent, analysts led by Scott Tuhy wrote in the report.
Ownership of calls (GPS:US) almost tripled since the Jan. 20 options expiration to 105,200 as of March 28, according to data compiled by Bloomberg. During that time, put open interest grew 23 percent to 35,414, the data show.
Since the last expiration on March 16, all five contracts with the biggest increases in ownership were bullish, with April $27 calls, 3.4 percent above yesterday’s close, adding 12,109 options from 543, the data show.
Gap doesn’t comment on moves in its stock, according to spokeswoman Edie Kissko.
The company is struggling with an eroding brand reputation and turnover in its management team, said Laura Champine, a specialty retail analyst at Canaccord Genuity Corp. in New York.
“There’s been major long-term damage to the brand after years of fashion misses,” Champine, who began coverage of the stock with a sell recommendation on March 26, said in a phone interview. “Recent management changes, including the January departure of Tom Wyatt, create significant uncertainty.”
Gap, which has franchise stores from Kazakhstan to South Korea, is introducing its first spring collection from its New York-based creative hub for product and marketing, after shifting it from San Francisco last year, and shaking up the leadership of that team in an effort to boost sales. Tom Wyatt resigned as president of the company’s Old Navy chain in January after leading the apparel retailer for more than three years.
The Chicago Board Options Exchange Volatility Index, known as the VIX (VIX), rose 0.2 percent to 15.51 at 12:42 p.m. in New York today after touching its lowest level since June 2007 on March 26. Its European counterpart, the VStoxx Index, fell 11 percent to 22.55 today.
Traders are bidding up the cost of bullish options on Gap. Contracts betting on a 10 percent gain had an implied volatility (GPS:US), the key gauge of options prices, of 30.49 yesterday, while the measure for puts protecting against a 10 percent drop was 35.19, according to data on 30-day options compiled by Bloomberg. The ratio between the two values rose 17 percent since its low on Feb. 28 and on March 23 reached 0.88, close to its highest level since August, the data show.
“People aren’t paying up for puts because they are not worried about the downside, while overall sentiment is so bullish,” Herb Kurlan, president of VT Brokers LLC, a San Francisco-based introducing broker specializing in futures and options, said in a March 28 phone interview. “Right now it seems like smooth sailing.”
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