A Trade on Guess? Inc. (GES)

Dear fellow options traders :

Checked that Guess? Inc. (GES), a renown maker of apparel and accessories for men, women, and children, would be reporting earnings on 4 Sep 2007 after-market-close.

According to a recent snippet in Briefing.com dated 27 Aug 2007, "Guess boasts a booming retail and wholesale business in Europe and is expanding operations in Asia and other parts of the world. For eight straight quarters, earnings and sales have grown by at least 67% and 16%, respectively. Guess is poised to keep up the pace when it reports fiscal 2008 second-quarter earnings on 4 Sep 2007."

On Friday, 31 Aug 2007, a few days before earnings announcement, GES even went up +$2.53 to close at $53.00.

I checked back GES most recent earning quarters & subsequent price gapping action after earnings announcement and found out that :-

1. Q1 earnings announcement on 5/6/07
On 6/6/07, GES gapped up about +$2.50 to $49.89

2. Q4 earnings announcement on 14/2/07
On 15/2/07, GES gapped up +$6.00 to $80.50 and went up another +$3.00 to close at $83.60.

3. Q3 earnings announcement on 1/11/06
On On 2/11/07, GES gapped up +$5.00.

4. Q2 earnings announcement on 2/8/06
On 3/8/06, GES gapped up +$2.00.

Noticed that GES has already gapped up 4 times after its earnings announcements mentioned above. I was a bit cautious trading a call towards GES earnings announcement this round because based on past experiences, some stock gapped down in the next earnings announcement after encountering around 3 straight gap-up following their earnings announcements.

For instance ..

Buffalo Wild Wings Inc (BWLD)

1. Q1 earnings announcement on 1/5/07
On 2/5/07, BWLD gapped up +$7.00 to $72.00.

2. Q4 earnings announcement on 15/2/07
On 16/2/07, BWLD gapped up +$4.85 to $54.84.

3. Q3 earnings announcement on 24/10/06.
On 25/10/06, BWLD gapped up +$7.00 to $48.00.

On the most recent Q2 earnings announcement on 31/7/07, BWLD gapped down -$7.00 to $36.50 after announcement. This gap down occurred after the 3 price gap-up followed by earnings announcement indicted above.

Another instance ....

Priceline.Com Inc (PCLN)

1. Q3 earnings announcement on 12/2/07
On 13/2/07, by 9.22am EST, PCLN reached +$3.64 to $49.57. By 10.09am EST, PCLN has climbed +$4.27 to $50.20.

2. Q2 earnings announcement on 8/11/06
On 9/11/06, PCLN gapped up +$3.00 to $43.40 but intra-day dropped back to close at $39.80.

3. Q1 earnings announcement on 7/8/06
On 8/8/06, GES gapped up +$3.40 to $29.80.

On its Q4 earnings announcement on 8/5/07, PCLN gapped down -$2.00 to $62.00 and went down intra-day another -$4.00 to $58.00 on 9/5/07.

The reason why a stock might gap down after experiencing a few successive quarters of gapping up from good earnings could be due to the high expectation that was built into the stock to perform better & better for every subsequent earnings. Thus, when the company did not report an "outstanding" earnings quarter together with upside guidance, the market would react negatively towards the earnings announcement and would sometimes punish the stock price ruthlessly.

After GES 4 previous gapping up due to good earnings, I expected high expectation to be built into the earnings this round. On 4 Sep 2007, I paper traded a Sep 50 Put @ $155.00 per contract when GES was around $53.50. Noticed how expensive the premium of the Sep 50 Put was, inflated with high implied volatility and it was out-the-money by a whopping $3.50!!!

On 4 Sep 2007 after market closed, GES reported Q2 earnings of $0.40 per share, $0.07 better than the Reuters Estimates consensus of $0.33; revenues rose 48.2% year/year to $388.3 mln vs the $345.6 mln consensus.

The company issued in-line guidance for FY08, expecting EPS of $1.79-1.84 up from $1.75-1.80 prior guidance vs. $1.83 consensus; expecting FY08 revs of $1.56-1.60 bln vs. $1.57 bln consensus.

As you can see, GES did not report a bad Q2 quarter. But the market might have reacted badly to its in-line EPS & Revenue guidance for FY08. On 5 Sep 2007, GES gapped down -$3.50 to $49.80. I sold the Sep 50 Put for $220.00 with a profit of just $35.00 (after deducting commissions).



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Tony Chai
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