Two trades to generate some income from outperforming retailers Walmart and Amazon

Walmart posted stronger-than-expected results, with impressive gains in revenues and margins. Walmart, particularly when compared to retailers such as Costco, does appear to be more cheaply priced, but is it actually the best value? Let’s do a little comparison shopping among retail stocks and options. Walmart (WMT) revenues rose 6% in the last quarter. Adjusting for inflation and an extra selling day in the quarter (it’s a leap year), revenues rose 4.8%. Additionally, gross margins increased 42 basis points (1 basis point equals 0.01%). So while many goods in Walmart’s stores may be subject to price rollbacks, it seems that Walmart’s operating results keep rolling on. In addition to strong operating performance for the quarter, the company raised its consolidated sales and adjusted EPS guidance for 2025 to the “high-end or slightly above original guidance.” Digging into the results more deeply there is more good news. As we think about the multiple premium afforded to online retailers such as Amazon, Walmart’s global eCommerce sales rose 21%. Walmart’s eCommerce is led by a store-fulfillment model — an approach Home Depot has also employed. The company also saw global advertising revenues rise by 24%-26% and a 13.3% increase in membership income from Sam’s Club. Remember that recurring membership income is oft-cited justification for the historically high multiple that Costco has enjoyed. Walmart shares, at 26 times earnings, are value-priced relative to Costco’s 46 times earnings. Walmart pays a higher dividend (1.3% vs 0.51%), and has a higher free cash flow yield than Costco (2.9% vs 2.6%). Walmart trade One can buy “right” and one can buy write. In options parlance, a buy-write is when one purchases shares and “writes” or sells covered calls against those shares to generate some incremental yield. For example, one could sell the June 65 calls against a long stock position as follows. Sell 1 $65 June 21 call Buy 100 WMT shares Of course, covered calls and buy-writes are relatively conservative investment strategies, best suited for stocks we are mildly bullish on such as Walmart. But these are not the only two stocks in the land. Is there an even better value in retail? Amazon trade Amazon (AMZN) is growing topline considerably faster. As of its most recent quarter, the retail side grew at 12%, at least double the growth of either Costco or Walmart. Profits from the AWS segment of its business grew 17%. Amazon revenues overtook Costco in 2016, and 2025 could be the first year that Amazon revenues exceed Walmart’s. The most remarkable statistic might be that despite this faster growth, when looking at price to estimated free cash flow, Amazon is the cheapest of the three, yielding 3.2%. Higher free cash flow yield and higher growth. One doesn’t see that too often. If growth is what you’re after buy Amazon. And if you still want to sell some premium in the name ahead of the company’s next earnings date in early August, buy a longer-dated call option, such as the November at-the-money $185 calls financed by the sale of a shorter-dated strangle such as the July $175/$195 – which does not capture that event – as follows: Buy $185 Nov 15 call Sell $175 July 19 put Sell $200 July 19 call DISCLOSURES: (None) THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.