$WMT – Price Break

by Dan April 29, 2016 3:08 pm • Commentary• Trade Ideas

Shares of Walmart are having their worst day today since its February 18th 3% decline following Q4 results that capped their first annual sales decline since 1980, and guided down for the current fiscal year 2017 vs their prior sales guidance given in November of up 3 to 4% this year, to “about flat”.

There are a couple very important inputs for WMT’s earnings and sales that have had massive moves since the company last spoke to investors on Feb 18th.  First and foremost, U.S. dollar strength, which, per the FT.com was in large part the culprit for the annual sales decline:

The 0.7 per cent decline in revenue to $482.1bn for the year ended January was due mainly to the strong dollar, without the impact of which sales would have risen 2.8 per cent.

Since February 19th, the U.S. Dollar Index is down 3.5%, and down 5.5% so far in 2016, and with 26% of WMT’s fiscal 2016 sales coming from outside the U.S., this could serve as a tailwind.

On the flip side, as one would expect, with dollar weakness has come strength in crude oil, up 50% from its mid February lows:

Crude vs DXY ytd from Bloomberg
Crude vs DXY ytd from Bloomberg

What’s important about this is that Gasoline at the pump on average has risen about 18% in that time period, per EIA.com, $1.87 in February to $2.21 in April.  And thats important to my trade idea because of the following headline from WMT’s Q4 call from their CEO:

“Lower fuel prices may provide tailwind in the U.S.”

So they may or may not provide a tailwind, and if the weakness of the U.S. Dollar does not provide a tailwind, then the stock is screwed.

And lastly, Amazon.com’s (AMZN) Q1 results last night demonstrate the growing success of Prime delivery, which helped the company achieve its second fastest growth in North America of 27% yoy in the quarter and its highest retail margin ever in North America of 5.4%.  Consensus estimates call for a 1% decline in WMT’s Q1 sales. AMZN is not only taking share but causing WMT to spend aggressively to build out their online offering including delivery options to compete with Prime.

Today’s weakness in the stock sort of comes all at once, as peers like Target (TGT) and Costco (COST) saw brokerage downgrades, and the weakest Univ of Michigan consumer sentiment print in 7 months.   The stock’s re-test of the uptrend that has been in place since its 52 week and multi-year lows in November could mark a technical inflection point, signalling the potential for a meaningful retracement if the company were to guide down once more.

From Bloomberg
From Bloomberg

WMT reports Q1 results on May 19th, and targeting a near term move back towards the stock’s 200 day moving average prior to results could be the way to isolate a post earnings breakdown.

I hate the idea of pressing the stock on a big down day like today, but put calendars may be a great way to offset some near term decay in an effort to own near the money puts for the earnings event.

So what’s the trade?  

*WMT ($66.66) Buy May 13th weekly / May 20th regular 65 put calendar for 50 cents

-Sell to open 1 May 13th weekly 65 put at 50 cents

-Buy to open 1 May 20th regular 65 put for $1

Break-Even on May 13th expiration:

Max profit at $65, but the ideal scenario is that the stock grinds lower, the May 13th weekly 65 put expires worthless, and the premium received for the short put more than offsets the decay of the May 20th regular 65 put that I want to own for the earnings events.  At that point I can look to sell a lower strike put and create a vertical put spread and further reduce my premium at risk.

Rationale: The short May13th call is tight but it misses the earnings event where we could see the real fireworks. The May regular put catches htose earnings. The ideal situation is to have WMT continue to work lower to the 65 level and have the May 13th puts expire worthless. That would leave us with a really cheap put in the May regulars into earnings.