WMT Already Warned About Spending, What Else Will Earnings Reveal?

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?

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 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.