Event: Whole Foods (WFM) reports their fiscal Q1 results tonight after the close. The options market is implying about a 9% one day move tomorrow, which is rich to the 4 qtr avg of about 6%, but basically in line with the 10 year average of about 9.25%.
Price Action / Technicals: WFM is down about 15% in 2016, and down 42% from its 52 week highs, and only about 2% from its 52 week lows made on February 8th.
The 10 year chart below shows the massive downtrend since WFM’s 2013 all time highs, the obvious technical resistance at $40, and what could be very precarious support at $28:
[caption id="attachment_63392" align="aligncenter" width="600"]
From Bloomberg[/caption]
Sentiment: Wall Street analysts hate the stock, with only 3 Buy ratings, 23 Holds and 3 Sells, with an average 12 month price target of $30.20, or only 6% higher than current levels. Short interest sits at almost 13% of the shares outstanding.
My Thoughts into the Print: There was a time in the recent past when WFM’s 30 – 40% earnings growth commanded an earnings multiple of the same. Over the last few years WFM’s eps growth has ground to a halt, with eps of about $1.50 in each of the last 3 years, and expected to be that in fiscal 2016. WFM now trades about 18x expected 2016 eps growth of 5%, a PE that is near an 8 year low.
The analyst community is pessimistic about the stock near term. There seems to be a consensus that growing competition will continue to pressure same store sales and margins in the current fiscal year, while new store formats and move towards electronic coupons and loyalty programs might help offset comp declines, but not until the latter part of the year.
The stock is down 18% from its early March highs, and with the decline from the 52 week highs, short interest and analyst sentiment where they are, I could not for the life of me stomach pressing this stock on the short side, despite probably being the right strategy in this market.
However, if there is the slightest bit of unexpected good news, this stock will be back at $31 in a heartbeat:
[caption id="attachment_63395" align="aligncenter" width="600"]
WFM ytd chart from Bloomberg[/caption]
So What’s the Trade?
The implied move is about 2.60 in either direction. The last few earnings cycles the stock has essentially been in the same place and seems to have settled in this 28 to 34 range since last August. A breakdown below 28 would be significant so any new longs or existing longs should look to define risk while being able to target a decent move higher on the event itself:
In lieu of 100 shares of WFM (28.50) buy the May6th weekly 28/32 call spread for 1.35
- Buy 1 May6th weekly 28 call for 1.57
- Sell 1 May6th weekly 32.5 calls at 0.22
Rationale – this call fly defines risk to 1.35 (vs the implied move of 2.60) and targets a move higher than the implied move to the upside. For those thinking that a takeover is possible in WFM at some point (similar to the recent one in TFM) selling the upside call can be optional. Although it’s unlikely that news happens on the call or in the two days before this trade expires. The break-even on this trade is 29.35, so not significantly higher than where the stock is trading. The key to this trade is if the stock breaks below recent lows the most that can be lost is 1.35.
We’ll offer the normal caveat for long premium directional event trades, you need to get a lot of things right to merely break-even, direction first and foremost, then timing and magnitude of the move.
Estimates and Forecasts from Bloomberg:
- 2Q adj EPS est. 41c (range 37c-43c)
- 2Q gross margin est. 34.8% (range 34.6%-35.1%)
- 2Q rev. est. $3.74b (range $3.67b-$3.84b)
- 2Q comp. sales est. -2.0% (Consensus Metrix, avg of 25)
- FY16 adj EPS est. $1.55 (range $1.45-$1.60); co. forecast $1.53 (Feb. 10)
- FY16 rev. est. $15.95b (range $15.69b-$16.14b), co. forecast $15.85b-$16.16b (Feb. 10)