target store carts

  • Target reported fourth-quarter profits that fell short of analyst estimates, causing its stock to decline on Tuesday.
  • Positioning data shows traders were expecting weakness in Target shares, and those pessimists cashed in on the stock loss.

No one ever said challenging Amazon would be easy.

Target is finding that out the hard way, having reported fourth-quarter earnings that missed consensus estimates, largely due to increased efforts to compete against the Jeff Bezos-led retail titan.

A major issue facing Target is how much it’s spending to deliver online orders amid its push into e-commerce. Those mounting costs, combined with holiday price cuts, combined to drop the company’s holiday-season gross margins to their lowest in 20 years.

Investors didn’t like what they saw, and they sent Target’s stock tumbling as much as 4.7% in pre-market trading. But that doesn’t mean all traders were caught off-guard. In fact, many were positioned to profit from this type of decline, which shows just how little confidence they seem to have had in Target’s e-commerce quest.

As the chart below shows, the one-month implied volatility spread between Target’s stock and an exchange-traded fund tracking the benchmark S&P 500 rose to the highest in seven years before the earnings report. Implied volatility reflects investor expectations of price swings, and higher levels imply bearishness.

Screen Shot 2018 03 06 at 8.47.53 AM

In addition, short sellers — or traders looking to profit from a share decline — pushed wagers against Target to multi-year highs heading into earnings. Short interest reached $4.3 billion on January 19, the highest since at least November 2015, and nearly triple its level in June, according to data compiled by financial analytics firm S3 Partners.

But it’s not all doom and gloom for Target right now. The company did grow sales by 3.6% last quarter, which beat forecasts.

After all, while Target’s competitive posturing versus Amazon hurt its bottom line this time around, both in-store and online traffic are accelerating. And while there may be pessimists out there betting on Target’s stock to decline further, they could be caught off guard if the company does turn the corner in upcoming quarters.

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