Option Trade 
Wal-Mart Stores, Inc. (NYSE:WMT) Puts 
Sunday, August 16, 2015

**OPTION TRADE: Buy the WMT Oct 2015 70.000 put (WMT151016P00070000) at approximately $1.20. Place a protective stop loss at $0.50, and a pre-determined sell at $2.50.

by Ian Harvey

August 16, 2015

Introduction

Wal-Mart Stores, Inc. (NYSE: WMT), which is engaged in the operation of retail, wholesale and other units in various formats around the world, is set to report second quarter fiscal 2016 results, before the opening bell on August 18th.

Consensus Wall Street analyst estimates project adjusted earnings per share (or EPS) of $1.125 in the quarter. That’s down 7% over 2Q15. The company’s guidance for EPS ranges from $1.06 to $1.18. Wal-Mart’s wage increases for associates, which were announced earlier in the year, are expected to reduce EPS by $0.04 per share in 2Q16.

There are several major headwinds which will drag down WMT's earnings for the next few quarters, as discussed further below.

After closing above $90 in the first week of January, Wal-Mart has been trending down for the last eight months, hitting a low of around $70 end of June before bouncing back to around $72 by the first week of August.

Technical Details

The stock price of Wal-Mart Stores Inc dropped 5.32% over the last 200 days, and is in unstable down trend. In the last 50 and 100 days, Wal-Mart Stores Inc is down 3.05% and down 12.9%, respectively.

Wal-Mart Stores traded up 0.33% on Friday, hitting $72.37. 2,347,420 shares of the stock were exchanged. Wal-Mart Stores has a 12 month low of $70.36 and a 12 month high of $90.97.

The company has a 50-day moving average of $72.48 and a 200 day moving average of $78.18. The firm has a market cap of $232.46 billion and a P/E ratio of 14.51.

Earnings

Previous Earnings

Wal-Mart Stores last posted its quarterly earnings results on Tuesday, May 19th. The retailer reported $1.03 EPS for the quarter, missing the Zacks’ consensus estimate of $1.04 by $0.01. The firm had revenue of $114.80 billion for the quarter, compared to analysts’ expectations of $116.30 billion.

During the same quarter last year, the firm posted $1.10 EPS. The firm’s revenue was down .1% on a year-over-year basis. Equities research analysts expect that Wal-Mart Stores will post $4.78 earnings per share for the current fiscal year.

Major Headwinds

It is encouraging that Wal-Mart has delivered positive comps at Wal-Mart U.S. in the last three quarters, after delivering negative comps since the third quarter of fiscal 2013. This was the result of lower fuel prices, which eased consumers' spending power. The company expects the trend of higher comps at Wal-Mart U.S. to continue in the soon-to-be reported quarter.

Despite the rise in comps, the retail giant expects soft earnings due to several headwinds:-

The Strong Dollar

Currency is expected to hurt profitability in the to-be reported quarter. The higher US dollar, combined with food price deflation in certain categories, is some of the chief headwinds facing the top line.

The Twin Billion-dollar Investments in Associate Wages

Wal-Mart anticipates huge expenses in the near term. It has committed to spend around $1 billion to raise wages of approximately 500,000 full-time and part-time associates at Wal-Mart U.S. stores and Sam's Clubs in the first half of fiscal 2016. In April, Wal-Mart raised its entry level wages to at least $9 an hour.

It has committed to raise it to at least $10 an hour by Feb 2016. The company expects investments in the new wage structure to reduce earnings by 4 cents per share in the second quarter of fiscal 2016. Including these, earnings are expected in the range of $1.06 to $1.18 per share, compared with the prior-year quarter's earnings of $1.21 per share.

Heavy Investments in E-commerce Infrastructure

Wal-Mart's increased focus on e-commerce initiatives will further lower profit margin potential, given shipping costs and price competition involved in it. The company is already burdened with increased health care costs due to medical cost inflation and increased health care enrollments in the U.S.

Same Store Sales

Same store sales for Wal-Mart U.S., the largest piece of Wal-Mart Inc., grew by a disappointing 1.1% in the last reported quarter.

International Markets

Walmart’s market share appears to have declined in two of its largest international markets, the United Kingdom and China. ASDA’s market share in the United Kingdom grocery market fell to 16.4% in the 12 weeks ended July 19, compared to 16.9% in the 12 weeks ended February 1.

China

Wal-Mart China has not been an encouraging tale for investors. Both the brick-and-mortar stores in China, as well as YiHaoDian, Wal-Mart China's online business, are facing strong challenges. Worse, Wal-Mart China will have to restructure and improve the business in a macroeconomic slowdown in the Chinese economy.

Walmart’s share of China’s grocery market was estimated at 4.7% in the 12 weeks ending June 12, 2015. That’s down from 4.8% in the 12 weeks ending March 20, 2015.

Insider Sales

Todd Marshall, an insider and also director of the public company Wal-Mart Stores, Inc. sold 60,000 shares of the firm with the insider transaction valued at $1,920,005 US Dollars – at an average $32.00 per share – as confirmed by the regulatory filing dated August 14, 2015.

Ex-president and CEO of Wal-Mart stores, Michael Terry Duke sold 419,082 (approx. 33% of his holdings) for an agreed value of $30,236,766 in a transaction dated 31st July 2015. After the transaction, Mr.Duke has 855,481 shares of the company left with him.

Analysts Opinions

Investment analysts at Deutsche Bank dropped their target price on shares of Wal-Mart Stores from $81.00 to $80.00 in a research note issued to investors last Friday. The brokerage currently has a “hold” rating on the retailer’s stock.

The company has also been the subject of a number of other research reports:-

• Credit Suisse reiterated an “outperform” rating and issued an $85.00 price target (down from $95.00) on shares of Wal-Mart Stores in a research report on Wednesday, May 20th.

• Morgan Stanley decreased their price objective on shares of Wal-Mart Stores from $82.00 to $80.00 and set an “equal weight” rating on the stock in a research report on Monday, June 8th.

• Raymond James raised shares of Wal-Mart Stores from an “outperform” rating to a “strong-buy” rating and set a $86.00 target price for the company in a research note on Monday, June 8th. They noted that the move was a valuation call.

• MKM Partners reissued a “neutral” rating and issued a $80.00 price objective on shares of Wal-Mart Stores in a research note on Monday, May 18th.

• Finally, Macquarie began coverage on shares of Wal-Mart Stores in a research note on Tuesday, June 9th. They set a “neutral” rating and a $76.00 price target for the company.

Three research analysts have rated the stock with a sell rating, fourteen have given a hold rating, seven have assigned a buy rating and one has assigned a strong buy rating to the company. The stock has a consensus rating of “Hold” and an average price target of $81.11.

Harvey’s Options Volatility Indicator

Conclusion

WMT has taken a severe beating so far in 2015. Although it has recovered a little from the 52-week low of $70.36, it is still about 20% below the 52-week high.

With prices declining for most of this year, the market sentiment of the company is increasingly negative. According to the headwind factors discussed, Wal-Mart will probably continue its downward trend.

Therefore, based on the facts above, and Harvey’s Options Volatility Indicator, the following option trade is recommended…..

**OPTION TRADE: Buy the WMT Oct 2015 70.000 put (WMT151016P00070000) at approximately $1.20. Place a protective stop loss at $0.50, and a pre-determined sell at $2.50.

”Success is simple. Do what's right, the right way, at the right time.”

Option Tip for your Success!
Options traders are not successful because they win.
Options traders win because they are successful.



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