Sign Up

Options Corner: Why Norwegian Cruise Line's Debt Storm Could Entice Bearish Speculators

Throughout the post-pandemic period, the concept of "revenge travel", a phenomenon where people sought to make up for lost time and experiences due to COVID-related restrictions, has been a powerful fundamental catalyst for businesses like Norwegian Cruise Line Holdings Ltd (NYSE:NCLH). Unfortunately, as economic difficulties continue to pile up, the idea that NCLH stock can continue to rise above a wall of worries is suspect. As such, there may be opportunities for the bearish side of the trade.

On paper, Norwegian doesn't necessarily appear as a candidate for downside speculation. In the cruise ship operator's second-quarter disclosure, the company posted earnings per share of 51 cents, meeting analysts' consensus estimate. What's more, it was a notable improvement over the year-ago quarter's print of 40 cents. On the top line, Norwegian's $2.52 billion admittedly missed the consensus estimate of $2.55 billion. However, the figure represented an improvement over last year's $2.37 billion.

Still, the devil may be in the details. The cruise ship operator has massive long-term debt to the tune of $12.63 billion, per its second-quarter press release. After paying net interest expense of nearly $237 million, the company was left with net income of only $30 million. That's a razor-thin margin amid a macro environment that isn't conducive to enterprises serving the consumer discretionary market.

Adding to concerns, the latest earnings results from big-box retailers don't provide much confidence. For example, Walmart Inc. (NYSE:WMT) produced a mixed earnings report, missing on the bottom line. During the conference call, management noted that the company has witnessed cost increases on a weekly basis as it replenishes inventory at post-tariff price levels.

Rival Target Corp (NYSE:TGT) didn't do any better. Although the retailer beat earnings and revenue expectations, it suffered from same-store contractions, along with a decrease in foot traffic. With consumers closing their pocketbooks, it's going to be increasingly difficult to justify bidding up NCLH stock.

A Cloudy Forecast Likely Awaits ...