How to Play JC Penney and Kohl's Using Options

By Andrew Keene  APR 04, 2013 12:50 PM

In the retail sector, Kohl's has benefited from tough times at JC Penney and Wal-Mart.

 


JC Penney (NYSE:JCP) has endured a rough run for the past two and a half years, and this trend shows no signs of reversal in the near-term or even the long-term. Shares in the beleaguered retail chain have dropped in value by 55% over the past 12 months. Bill Ackman, the hedge fund manager who is currently the largest shareholder in the department store chain, continues to struggle to drum up capital for a buyout. Due to the disproportionate debt to market value ratio held by JC Penney, a traditional leveraged buyout seems to be entirely out of the question, and as time passes, the difficulty involved with organizing a buyout will only increase.

All of these troubles come in the wake of the lowest annual sales figures since 1986 and a net loss of $986 million last year. Continual sales woes and structural factors have driven large shareholders to dump JCP shares, most notably Steven Roth of Vornado Realty Trust (NYSE:VNO). Roth, a former JC Penney board member, dropped 40% of his holding in JCP in March. More large sell-offs look increasingly likely.

Kohl’s Corp. (NYSE:KSS), on the other hand, has been bolstered by the recent struggles of both JC Penney and Wal-Mart (NYSE:WMT). The latter has recently experienced staffing issues resulting in chronically empty shelves and declining customer satisfaction ratings, which have only recently had a tangible affect on consumer preferences. Even before Wal-Mart’s issues became apparent, Kohl’s had begun an upward trend in share valuation, with the three-month trendline indicating that JC Penney’s continual struggles have likely translated into shifts in consumer preference in favor of Kohl’s. Kohl’s will continue to compete with Wal-Mart, Target (NYSE: TGT), and Costco (NASDAQ:COST) over former JC Penney customers, but recent trends suggest that they are now doing so more effectively, pushing their stock value up over 7% on the year.

Buying the JCP Jan 2014 10 puts for $1.37

Risk: $137 per 1 lot
Reward: $873
Breakeven: $8.73

Greeks of the Trade:
Delta: Short
Gamma: Long
Theta: Short
Vega: Long

Buying the KSS Jan 2014 52.5-57.5 bull call spread for $1.00

Risk: $100 per 1 lot
Reward: $400 per 1 lot
Breakeven: $53.50

Greeks of the Trade:
Delta: Long
Gamma: Long
Theta: Short
Vega: Long
No positions in stocks mentioned.