China, Currencies Could Factor in Wal-Mart, MGM Earnings

When Wal-Mart Stores, Inc. WMT reports earnings before the market opens Thursday, the results could be history-making—not necessarily good news for the world’s largest retailer. Due largely to tough competition from its e-commerce rival Amazon.com, Inc. AMZN, WMT is expected to report declining revenue for the first time in at least the last 25 years, according to Wall Street analysts.

Analysts reporting to Thomson Reuters believe the blue chip’s revenue probably fell to $130.76 billion in Q4, down just 1% from the comparable year-ago period. WMT earnings are projected to fall to $1.43 a share, 11% lower than a year earlier. The company itself has guided for EPS in a range of $1.40 to $1.55.

Some of WMT’s challenges are seen up and down the retail sector. And in fact, WMT shares have performed well relative to some peers and the broader stock market so far in 2016.

According to traditional retailers who’ve reported or warned for upcoming results, their Q4 was a tough one because of strong e-commerce sales at sites including Amazon and a couple of epic winter storms. Industry analysts are also trying to figure out a consumer who generally wasn’t willing to spend gas-pump savings on clothing and other items that usually go under the Christmas tree. Some analysts say that WMT’s customer is typically more sensitive to budget-changers including gas prices and so the cheaper gas factor could continue to play out for this stock.

WMT is again upping its hourly wage this month as part of its multi-year effort to increase wages. While that’s good news for employees, it typically puts a dent in profits. Investors could also be tuning in for updates on several initiatives taken by the company in the last few months: closure of Walmart Express stores, plans to operate its own gas stations, and a new mobile payment app called Walmart Pay.

But there are global issues at work, too. WMT has been slammed by foreign-currency headwinds, which Yahoo Finance estimates slashed $12.3 billion from the top line in the last three quarters.

Welcoming Tax Time?
What may matter now is how WMT sees the coming quarters, particularly Q1 when many tax-refund checks are cashed—and potentially spent in WMT stores. Could Q1 and Q2 deliver the earnings results that some investors are starting to price into shares?

Trading has been fairly active in WMT shares leading up to the earnings release. Implied volatility on the stock is relatively high at the 89th percentile. Short-term option traders have priced in a potential 3.5% share price change in either direction around the earnings release, according to the TD Ameritrade thinkorswim® platform’s Market Maker Move indicator.

As for options action, there’s been aggressive buying of the Feb 65 put options this week, but limited activity on the call option side. A few weeks ago, an increase in call buyers interested in the 67.50 strike emerged.

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.

At Thomson Reuters, the average earnings estimate sits at $0.08 a share compared with a surprise loss of $0.70 a share a year ago. Revenue is projected to decline to $2.3 billion from $2.4 billion in the year-ago period. In fact, top-line sales hovered near that mark each quarter last year.

Industry analyst are pinning the tough performance on the challenges that MGM and other gaming companies faced in Macau, China’s gambling harbor. Besides the economic slowdown in China, Beijing cracked down on reports of corruption and the number of gambling tables allowed in Macau, impacting casino tallies. Strong-dollar issues also touch U.S.-listed MGM.

But MGM shares are riding a momentum train of late, due in part to comments from Steve Wynn last week. The head of rival Wynn Resorts, Limited WYNN reported depressed Q4 earnings and revenue but noted on a conference call that January sales in Macau were “the best month in a long time,” industry analysts reported. That has some on Wall Street believing that things are stabilizing in Macau, potentially a boon for MGM, too.

This speculation helped boost MGM shares, which tend to trade in a volatile manner. Implied volatility on the stock is at the 90th percentile as the earnings release nears.

Short-term option traders have priced in a potential 7% share price change in either direction around the earnings release, according to the TD Ameritrade thinkorswim® platform’s Market Maker Move indicator. As for options, buyers jumped in for the Feb 18.50 put options, mostly this week. Buyers are also lining up for the Feb 19 call options.