Get The Ticker Tape delivered right to your inbox.

X

WMT, HD Earnings: Is Store Vs Online Shopping Driving Retail?

Share Print
November 16, 2015
What’s driving retail? Store vs. online shopping.

An already battered retail sector will see results from another handful of stores this week, leaving some on Wall Street to question what’s really up with spotty consumer spending while job market health improves.

The bigger driver of stock volatility may be continued lost demand at traditional bricks-and-mortar retailers to online competitors. Shares of traditional department stores Nordstrom (JWN), Macy’s (M), and JCPenney (JCP) were all clobbered last week following their respective earnings reports. Retail sector declines helped deliver the broader stock market its first weekly loss in seven weeks.

This week, 18 S&P 500 companies, mostly retailers, report earnings results, and two Dow Jones Industrial Average components are due out with results early Tuesday: Wal-Mart Stores (WMT) and Home Depot (HD). 

Street economists expect WMT to report a Q3 profit of $0.98 per share, down 15% from the year-ago comparable, on sales of $118.04 billion. Home Depot (HD) is pegged for a $1.32 per-share profit on $21.77 billion in sales.

With more than 90% of the S&P 500 having already reported, earnings are down some 1.8% from a year ago, according to FactSet. That means Wall Street could be looking for these late-season newsmakers to potentially “salvage” the quarter. If they don’t, will it invite increased uncertainty heading into the holiday spending season and the Federal Reserve’s December rate decision?

WMT stock chart

FIGURE 1: FEW SMILES?

Wal-Mart Stores (WMT) stock has had a tough year as Wall Street digested its aggressive spending plans against a $20 billion share buyback. Wal-Mart shares are down 21% over the past three months compared with the S&P 500, which is down 2.4% for the same period. Data source: Dow Jones. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

More to Warn About?

Wal-Mart Stores is due out with its Q3 report card on Tuesday before the market opens. The retail giant’s shares tumbled in mid-October (figure 1), when it announced a $20 billion share buyback program and lowered its fiscal 2017 outlook as a result of billions in capital investments in part to boost its e-commerce competitiveness. The Street could be looking for more insight into 2017 expectations and holiday spending hopes with Tuesday’s report.

Short-term options traders are pricing in a potential 3.5% move in either direction for the stock around earnings, according to TD Ameritrade’s thinkorswim® platform’s Market Maker Move indicator. Implied volatility is at the 87th percentile, meaning that the options market appears nervous (or happily salivating) about what’s ahead.

HD stock chart

FIGURE 2: HD HAMMERED LATELY?

Home Depot (HD) shares, on a tear for much of this year, are trading at their lowest since early October in recent sessions. Data source: Dow Jones. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Another Beat in Store?

Home Depot (HD) may not face the same online versus in-store slug fest as that seen across much of the retailer space.

HD shares have climbed some 16% year to date through last week, which many Street analysts pin on consistently higher comparable-store sales (up 4.2% in Q2) and fatter gross margins.

It has topped Street expectations for the past five straight quarters and could be helped by government and building industry data that show continued improvement in home construction demand.

The bigger near-term risk to its stock may be whether or not this largely favorable picture has already been baked into the stock price? Shares have already begun to pull back from the $126.12 high hit earlier this fall (figure 2).

HD’s implied volatility isn’t terribly interesting at the mid-range. Short-term options traders are pricing in a potential 3.25% move in either direction for the stock around earnings, according to TD Ameritrade’s thinkorswim® platform’s Market Maker Move indicator. We’ve seen some increased buying interest of the monthly 128 call options and monthly 120 put options. Trading volume around these contracts has been twice their regular draw.

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price and over a set period of time. Put options represent the right, but not the obligation, to sell the underlying security at a predetermined price over a set period of time.