In usual circumstances, companies that surpass earnings expectations, especially when navigating challenging conditions, typically receive a positive response from investors. However, Nordstrom (NYSE:JWN), the department store giant, experienced a decline in its stock price, both during regular trading hours and after-hours trading. Even contrarian investors should exercise caution before considering an investment in this upscale retailer.
At face value, Nordstrom’s fiscal second-quarter performance should have elicited optimism. According to reports from the AP, the company reported a net income of $137 million, equivalent to 84 cents per share. This figure surpassed the consensus estimate of 45 cents per share by Wall Street analysts. Additionally, the department store operator achieved sales of $3.77 billion, exceeding the consensus target of $3.67 billion.
Nevertheless, JWN stock saw a decline of over 4% on Thursday, with a further 0.42% drop in after-hours trading. What caused this negative response? Despite the strong Q2 results, the company’s management maintained their previous full-year outlook, indicating a cautious approach. The leadership team anticipates a 4% to 6% decline in revenue and adjusted earnings per share ranging from $1.80 to $2.20 for the fiscal year.
To be fair, retail sales in the U.S. displayed a stronger-than-anticipated increase of 0.7% in July compared to June, as reported by another AP article. Despite the ongoing pressures stemming from the COVID-19 pandemic, consumers are still spending. This led some traders to believe that JWN stock was an appealing speculative opportunity.
However, a pessimistic perspective revolves around a straightforward observation: if the economy doesn’t experience a substantial turnaround, consumer discretionary spending sentiment could dwindle. This scenario would likely have adverse effects on Nordstrom.
Mixed Signals in the Options Environment Surrounding JWN Stock
Expectedly, given the significance of Nordstrom’s Q2 performance, the stock attracted attention in Barchart’s screening of unusual stock options volume. The total volume reached 65,127 contracts, compared to an open interest of 149,301 contracts. Notably, the difference between the volume during the Thursday session and the trailing one-month average was 566.12%.
Breaking down the transactions, call volume reached 28,553 contracts, while put volume reached 36,574 contracts. This resulted in a put/call volume ratio of 1.28, which leans toward bearish sentiment. Furthermore, JWN’s put/call open interest ratio stands at 1.25.
However, it’s important to note that analyzing the headline figures alone can be misleading. Traders have the ability to sell both calls and puts, essentially reversing the initial implications of these contracts. Additionally, sophisticated trading strategies involving different products can complicate the analysis.
Yet, examining Fintel’s options flow screener, which focuses on substantial block trades typically initiated by institutions, the near-expiry contracts appear to predominantly reflect a bearish sentiment. For instance, contracts expiring on October 20, 2023, with strike prices ranging from $17.50 to $25, are largely associated with bearish transactions.
Moreover, the most recent significant block trades before Thursday’s market close were put contract purchases: $14 and $16 puts, expiring on August 25 (Friday). This situation is certainly not indicative of a positive outlook.
Certainly, not all institutional traders hold a negative view of JWN stock. Notably, some traders have sold $15 puts (a neutral-to-bullish strategy) with a January 17, 2025 expiration. These sold puts have notably higher premiums compared to the premiums associated with the opposing put purchases expiring on the same date.
However, these sold puts were transacted between May 31 and July 12, a period during which JWN stock surged from $15.30 to $20.04. At that time, selling puts aligned with Nordstrom’s positive prospects. Yet, in the past five sessions alone, JWN stock has declined by nearly 11%, suggesting that even sophisticated investors might be feeling the pressure.
External Factors Pose Challenges for Nordstrom
Looking ahead to the coming months, Nordstrom’s fate will hinge on prevailing consumer sentiment. If consumers continue to defy expectations and indulge in discretionary spending, JWN stock could present an opportunity for contrarian investors. However, there’s also the possibility that households are financially stretched.
One evident concern revolves around credit card debt, which recently surpassed the $1 trillion mark. While Americans have historically found themselves in financial trouble due to excessive credit card use, this time might be different. With the Federal Reserve’s efforts to combat inflation through increased interest rates, higher borrowing costs could eventually burden struggling households.
Additionally, companies are consistently reducing their workforce due to mounting economic pressures. T-Mobile (NASDAQ:TMUS) is a recent example, having announced layoffs of around 5,000 employees, approximately 7% of its workforce. If more companies follow suit, consumers would naturally curtail their spending, spelling negative implications for JWN stock.
Featured Image: Megapixl @ Jetcityimage
Author Faith Yakubu 
