Options Traders Laying Bets That Wal-Mart Can Rejoin Bull Market

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Options investors are speculating Wal-Mart Stores Inc. is about to get some relief from consumers after its worst start to a year since 2009.

Demand for contracts to protect against losses in the stock fell last week to the lowest level in six years compared to bullish ones, data compiled by Bloomberg show. Wal-Mart shares have lost 9.1 percent in 2015 after announcing it would raise wages and a strong U.S. dollar cut into the value of overseas revenue.

The world’s largest retailer is still waiting for shoppers to bring it the money they saved on gasoline after U.S. data from March showed retail sales were less impressive than economists forecast.

Investors may be pleasantly surprised when the company reports results in two weeks, according to Max Breier, a senior equity derivatives trader at BMO Capital Markets Corp. “You’ve got the added tailwind of still relatively low oil prices that I think are helping its target consumer base.”

Wal-Mart is in the midst of a turnaround plan under CEO Doug McMillon to cut expenses and bolster efficiency. It announced last week it’s eliminating its U.S. regional-division executive vice president positions as it seeks to simplify operations and improve customer service.

Currency Fluctuations

The shares hit an all-time high in January before starting a retreat that accelerated a month later when the company cut its annual forecast to reflect currency fluctuations and the costs of boosting wages. The retailer said Feb. 19 it expects sales growth of 1 percent to 2 percent this year, down from a previous forecast of as much as 4 percent.

Some analysts say the persistent drop in gas prices will finally translate into gains in consumer spending large enough to offset the effects of a stronger dollar that has hurt retailers from Wal-Mart to Costco Wholesale Corp.

“Elevated crude oil inventories may help keep gasoline prices below $3 a gallon even as the U.S. heads into the peak summer driving months,” Poonam Goyal and Vincent Piazza, analysts at Bloomberg Intelligence, wrote in a note May 4. “The benefit to retail sales and traffic may also be the highest in the coming months since savings for the consumer will be greatest then,” they wrote.

Wage Growth

BMO’s Breier said he sees signs of consumer strength in stronger wages and other data. Wages for private-sector employees climbed 0.7 percent in the first quarter and were up 2.8 percent in the 12 months through March, the biggest gain in more than six years, the Labor Department reported last week.

“Finally, the benefits of six years of QE is kind of trickling down to the more middle-income consumer base and that’s being reflected in wages and employment and even spending and consumption data,” he said. “Those are all positives for Wal-Mart.”

Contracts betting that Wal-Mart shares will decline 10 percent cost 0.82 points more than those wagering on a 10 percent increase on April 29, according to one-month options data compiled by Bloomberg. That’s the lowest for the price relationship known as skew since May 2009.

The company’s shares rose 0.6 percent to $78.53 at the close in New York.

Wal-Mart spokesman Randy Hargrove said the company does not comment on options trading.

Food Inflation

Higher sales along with slowing food inflation could additionally help gross margins, according to Jennifer Bartashus, an analyst at Bloomberg Intelligence. The food-at-home consumer price index dropped in March to its lowest level since April 2014.

“Food retailers including Kroger, Whole Foods, Roundy’s, Ahold, Delhaize and Wal-Mart should see some gross-margin relief as food inflation decelerates,” Bartashus wrote in a research report May 4.

Wal-Mart will release its first-quarter results on May 19. Analysts estimate earnings per share were $1.05 for the period, 4.3 percent below a year earlier, according to 25 predictions compiled by Bloomberg.

Analysts have continually lowered their forecasts for the quarter. Since February when the company announced it would raise wages and cut its annual forecast, estimates have fallen almost 8 percent.

“The stock, it’s been disappointing to say the least,” said Walter Todd, who oversees about $1 billion as chief investment officer for Greenwood, South Carolina-based Greenwood Capital. “There’s enough pessimism in the story, in the name at these levels that the earnings could provide an upside surprise.”