img3950_9726_400_3001-300x225Event: Department store chain Macy’s (NYSE: M) reported earnings for the quarter ending Feb. 2, 2013 on Tuesday before the market opened. Macy’s said it earned a profit of $2.05 per share excluding items in the period versus an estimate of $1.98. Revenues were in line with expectations. For the full year, Macy’s said it expects profit in a range of $3.90-$3.95 per share. The average estimate for the current fiscal year is $3.81. Shares of Macy’s were up sharply in the pre-market after the news was released. While shares opened substantially higher, the gains did not hold. In late morning trading on Tuesday Macy’s was up 2%.

Analysis: The report from Macy’s was about as perfect as one could expect. Given that shares were down on Monday, one would expect the stock to rally significantly on such positive news. Typically a stock with what I call the trifecta of good news will gain 5% or more in the immediate trading after the report is released. The weakness in Macy’s is significant and appears to be mainly due to the cautious testimony of the Federal Reserve chairman appearing before Congress to testify about the economy. In addition, stocks are more than due for a pull-back irrespective of operating performance. We could be witnessing a buy the rumor/sell the news sort of event with Macy’s. There are strong tailwinds for consumers heading toward spring and beyond. It is admirable that Macy’s is optimistic about its future, but I think some caution in the short term is warranted. I see this stock drifting lower over the next few months in advance of the next earnings report. The set-up is perfect for a post earnings momentum trade. On this one I would own April or May puts.

Action: Buy M May $40 Puts


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