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Bull Spread for Wal-Mart in 2010

Mkt cap 206.55B,  P/E 15.67,  Div/yield 0.27/2.01,  EPS 3.46,  Shares 3.81B,  Beta 0.26, institutionsowns own 37%.


With sales of over $400 billion representing nearly 10 percent of U.S. retail sales in 2008, the global discount retailer Wal-Mart (NYSE:WMT) is number two on the Fortune 500 list of America's largest corporations, behind Exxon Mobil (NYSE:XOM). With a market cap of $206.77 billion, annual revenues of over $400 billion, and over two million employees worldwide, Wal-Mart (WMT) stock is central to investors engaged in stock option trading.

Because of its dominance in the retailing industry and its weekly consumer base of almost 200 million shoppers, knowledgeable stock option traders, investors, and economists often look to Wal-Mart’s performance as a barometer of U.S. economic health. During economic downturns, Wal-Mart (WMT)tends to fare better than other retailers because it sells everyday consumer items that customers will buy even during tough times, including generic drugs for four dollars per prescription. Economies of scale and Wal-Mart’s famed (or notorious) operating efficiencies enable Wal-Mart to keep most prices lower than its primary competitors including Kohl's (NYSE:KSS), Target (NYSE:TGT), and Sears (NASDAQ:SHLD). 

The Global Recession
Consumer spending is a significant driver of the U.S. economy, spurring two-thirds of all economic activity. The global recession that began in late 2008 has hit U.S. retailers very hard. With the recovery beginning in 2009, U.S. retail sales rose in the summer, aided by the federal “Cash-for-Clunkers” program. But at the close 2009 home values remained depressed and unemployment continued to rise, which affected consumer confidence. In the two months of November and December each year, most retailers earn 50% or more of their sales and profits for the full year, and as the 2009 holiday buying season approached retailers were apprehensive. 

Wal-Mart (WMT) was no exception. For the three-month period ended October 31, 2009, the retail giant reported mixed results, saying that the sales environment was “difficult.” Wal-Mart Stores reported a third-quarter profit that beat analysts' estimates even though its store sales fell in the period. Net sales in the period were $98.7 billion, up 1.1% from the previous year.  Wal-Mart shares price did not change much during the October quarter, but the closing price was down 11 percent from the previous year. With posted earnings of 84 cents per share, up from 77 cents a share a year ago and spurred by inventory reductions and other cost-cutting measures, the retail giant’s P/E ratio and EV/CFO ratio were both lower than they had been in 2008. 

Same-store sales, which measure sales at stores open at least a year, are a key measure of a retailer's performance. In the quarter ending October 31 Wal-Mart's same-store sales declined 0.4%. "The sales environment continued to be difficult this quarter, but customer traffic is up throughout the company," Wal-Mart CEO Mike Duke, said in a statement.

For the fourth quarter, which included the holiday shopping period that typically is the most critical selling season of the year for retailers, Wal-Mart issued a disappointing same-store sales forecast.

In December, WMT reported a 1.7 percent same-store sales increase, but it said that it expected little improvement in January 2010, with same-store sales likely to be flat or 2 percent higher. Thomas M. Schoewe, the company’s chief financial officer, estimated Wal-Mart’s fourth-quarter earnings at 91 to 94 cents a share, down from the company’s previous forecast of $1.03 to $1.07. 

2009 Overview and 2010 Forecast 
Despite the robust Wall Street recovery in 2009, Wal-Mart (WMT) shares are down almost 3% for the year, lagging behind the S&P by nearly 25 percent. Wal-Mart’s competitors have fared better over the year; stock options traders profited from a nearly 40% rise in Target (TGT) shares and a roughly 80% increase in the share price of TJX (NYSE:TJX) and Sears (SHLD).

Prior to the 2009 holiday season the company had already made substantial price cuts. It offered more than 100 toys for $10 each, and it cut prices on popular new hardcover book titles by 60% or more, setting off a price-cutting war with rivals and Barnes & Noble. Wal-Mart said it would also extend other deals such as top Blu-Ray movies for under $20.  As we enter 2010, U.S. retail competition will only intensify.  To put pressure on competitors, on December 23, 2009 Wal-Mart announced it would extend its holiday discounts and deals into the week after Christmas, even as it introduced new ones.

In 2010 Wal-Mart (WMT) may surprise skeptics. The global retailer is undergoing a corporate transformation that focuses on remodeling the stores to give them a more contemporary, less bargain-basement look that may lure shoppers back from trendier discount stores such as Target.

Option Strategy:

stock price : 54.3$
Buy   50      June10  in the money.
Sell   57.5   June10  in the money.

Time decay (positive theta)is in favore.
If by June WMT (Wall Mart) will top 57.5$ there is a profit of above 50%, and if the price wont change, still there is a reward of more than 10% of the risk taken.

Please advise that trading standardized options involves risk, read the following disclaimer.

Disclosure: No position In Wall Mart