If today’s earning reports are any indication for the retail sector’s Christmas shopping season then they are in t-r-o-u-b-l-e. Don’t shoot the messenger but Abercrombie & Fitch (ANF, $19.61, down $2.83) and JC Penney (JCP, $17.40, down $1.88) are getting walloped this morning after reporting disappointing earnings.

Abercrombie profits fell 45% to $64 million, or $0.72 a share, from $118 million, or $1.29 a share, a year earlier. Stores sales are falling as the company reported an overall 8% drop to $896 million. Wall Street was expecting a profit of $0.71 cents per share on revenue of $909 million.

It was worse at JC Penney’s as the company saw its quarterly profit fall over 50% to $124 million, or $0.55 cents a share, from $261 million, or $1.17 a share, a year earlier. Sales fell 9% to $4.3 billion, while same-store sales decreased 10%. Wall Street was looking for $0.53 cents a share in the third quarter and $1.32 for the fourth quarter.

Wall Street’s estimates were already trimmed for these two retailers and the fact that they reported a mixed bag is not good news. We got a retail sales report this morning that October was the worst decline ever recorded as sales fell by 2.8% last month. That was a much larger decline than the 2.65% drop in November 2001 which was right after the terrorist attacks.

Abercrombie is down from a high of $84.54 while JCP is down from a high of $51.42. Wow. There has been heavy activity in the options on both of these stocks. The Abercrombie November 22.50 puts (ZWRWX, $3.30, up $1.50) are up 83% today while the JC Penny November 17.50 puts (JCPWV, $1.05, up $0.20) are up over 20%. If you got into these plays yesterday before these two companies reported earnings then you have done well today.

I mentioned Abercrombie here in the blog back in August when the stock was at $50. I said at the time it could be headed much lower before it returns to its glory days and some of you may have gotten into the September put options I recommended. They did well but probably not as well if we had bought a November put option instead. Abercrombie has fallen 30 points since then and we certainly left some money on the table.

Ambercrombie could test $17 and if that level fails it could be headed to $10. If this is the case then the December 17.50 puts (ZWRXW, $1.70, up $0.45) could double.

Rick Rouse