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Play Puts on Walmart (WMT) Drama

Walmart's dependence on low-income consumers could hurt their business


There are several broad economic indicators that have recently been presented which will not help the retail sector in general – and is very likely to bode badly for one major retailer in particular —   Wal-Mart (WMT).

  • Personal income and spending for July was a very anemic 0.1%, which was half of what  economists promised. Spending rose by just 0.1%, which was only a third of what the economists expected.
  • The Thomson Reuters/University of Michigan’s final reading for consumer sentiment sagged from 85.1 in July to 82.1 in August.
  • This last reading directly contradicts last Tuesday’s Conference Board’s Consumer Confidence numbers, which were supposedly showing a 0.5 point gain in August.

Some reports have shown very small gains, with little or no margin of error – others are shown losses of some size – whilst another is contradictory in the numbers.

Besides the economic indicators, Wal-Mart has several other factors that are, or will, cause further damage to its present position – sell signals blaring, an unexpected earnings miss, economic battles, insider sales and overseas dramas.



Technical Issues

Wal-Mart investors are having no problem sorting through the numbers. Over the course of the summer, WMT has put up a clear double top. And in the past few weeks, it has confirmed that warning with a huge sell signal.

The previous three sell signals saw an average follow-on loss of -6.67%. However this latest signal adds in a broken trend bottom and a broken 200-day (40-week) moving average to the usual mix.

Earnings Miss

In a bit of an earnings report shock, Wal-Mart stores unexpectedly missed estimates for the second quarter. Same-store sales dropped 0.3%, while net income only increased by $50 million from the previous quarter. The reasons for the miss were supposedly due to circumstances beyond Wal-Mart’s control; including events such as:-

  • the Social Security and payroll tax hikes hurting their working-class customer base,
  •  inflation-driven grocery bill increases and
  • international sales dropping 2.9%, which the company attributes to the poor weather in Asia and Europe.

For the past few years, Wal-Mart had been seen as the recession-proof big box store. This is thanks to a low price model that enables working-class people to fulfill their grocery needs without breaking the bank, in addition to leading the pack in low-skill hiring. This second-quarter downturn caught a lot of people off-guard, especially when its more up-market competitors did comparatively well.

Economy Driven

Previously, other factors have shown that the economy has been improving, such as housing, and therefore more shoppers will go to Costco  (COST) or Target (TGT) than Wal-Mart if they can afford to. The perils of Wal-Mart’s model is that its customer base tends to live paycheck to paycheck, causing something like the recent payroll tax hike to hinder customer buying habits more than it would at the other two stores, whose customers tend to have a stronger financial footing.

As the economy improves, Costco and Target will improve for investors as well. Wal-Mart, on the other hand, will probably stagnate as it adjusts to the new economic realities its customers face.

Insiders Trading Worrying

Over the latest half-year time frame, Wal-Mart has experienced zero unique insiders buying, and 4 insider sales.

Overseas Dramas

Wal-Mart has stopped expanding in India despite the fact that the retailer and its joint venture partner Bharti Enterprises had started to do reasonably well.

One reason for this decision is that the Indian government is examining whether WMT’s $100M convertible debenture investment in Cedar Support Services (the parent of Bharti Retail) amounted to an illegal foreign direct investment in supermarkets.


Therefore, with so many factors working against Wal-Mart, it seems likely that further price decline is likely. To take advantage of this situation it seems prudent to execute the following options trade….

OPTIONS TRADE: Buy the WMT Jan 2014 70.000 put (WMT140118P00070000) at or under $1.75, good for the day. Place a protective stop limit at $0.70 and a pre-determined sell at $2.70.

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