Retail-sector earnings kicked off on a positive note this morning, as Home Depot Inc (HD) beat expectations and guided higher for 2016. The bar is set high for Target Corporation (TGT) and Wal-Mart Stores, Inc. (WMT), which both enter the earnings confessional later this week.
Not to discount Target’s earnings, but all eyes will be on Walmart’s results after the close tomorrow given the recent rise in minimum-wage laws across the U.S.
Diving straight into the numbers, Wall Street sees Walmart earnings plunging 13.6% year-over-year to 89 cents per share, with revenue down 1.4% to $113.22 billion. However, many in the brokerage community aren’t as optimistic, with EarningsWhisper.com reporting a first-quarter whisper number of 88 cents per share.
This negativity is even more apparent in WMT stock’s ratings backdrop. Specifically, 25 of the 29 analysts following WMT rate the shares a hold or worse, compared to just four buy ratings.
What’s more, the 12-month consensus price-target of $65.04 represents a discount to Monday’s close at $66.02.
Even short sellers are getting in on the act — an unusual occurrence for WMT stock. During the most recent reporting period, the number of WMT shares sold short rose 13% to 32.2 million shares. There is plenty of room for this trend to continue, as short interest only accounts for about 2.3% of WMT stock’s total float.
Options traders have taken a more noncommittal approach to WMT stock. Currently, the May/June put/call open interest ratio stands at 0.81, with calls just outnumbering puts among near-term options. This ratio rises slightly to 0.83 when we look at just the May 20 series, indicating a bump in skepticism concerning Walmart’s earnings.
Overall, May implieds are pricing in a potential post-earnings move of about 3.5% for WMT stock. This places the upper bound at $68.30, while the lower bound lies at $63.70. Technically, both bounds lie outside of key support and resistance from Walmart’s 50-day and 200-day moving averages, and a breach in either direction could spark a greater-than-expected move for the stock.
2 Trades for WMT Stock
Put Spread: While the bar is set quite low for Walmart earnings — indicating a possible beat — guidance will be the real issue for the company. Walmart is no Home Depot, and rising wages across the U.S. are sure to continue to eat into the company’s slim margins. As such, traders looking to bet against WMT ahead of earnings may want to consider a June $62.50/$65 bear put spread.
At last check, this spread was offered at 64 cents, or $64 per pair of contracts. Breakeven lies at $64.36, while a maximum profit of $1.86, or $186 per pair of contracts, is possible if WMT closes at or below $62.50 when June options expire.
Call Sell: If betting directly against WMT stock makes you nervous, a May 20 series $70 strike call sell position may fit the bill. Such a trade is especially useful if you already own WMT stock, as it allows you to offset some of your portfolio losses in the event of a selloff, but also allows you exposure to any upside up until the stock trades at or above $70.
At last check, this option was bid at 9 cents, or $9 per contract. A sold call allows you keep the premium as long as WMT stock closes below $70 at expiration.
On the downside, if WMT rallies above $70 prior to expiration, you could be forced to provide 100 shares at current market value for each call sold, which could be quite costly if you do not have enough stock on hand to cover the call.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
