Walmart turns weak as Amazon enters grocery business

The world’s largest retailer by revenue, Wal-Mart Stores (NYSE: WMT), saw its stock fall by 4.65% to $75.24 last Friday. The acquisition of organic food retailer Whole Foods Market (NASDAQ: WFM) by Amazon (NASDAQ: AMZN) paved way for the decline as Wall Street assumes that the competition in the retail sector will increase and ultimately erode the earnings of Walmart.

Ironically, market discarded the acquisition of Bonobos, a men’s wear company, by Walmart. We anticipate the stock of Walmart to decline further in the near-term future due to reasons mentioned below.

Last Friday, Walmart announced the acquisition of Bonobos for $310 million in an all cash deal. The acquisition, which was first rumoured in April, is yet another effort put forth by Walmart to protect its market share from the e-commerce giant Amazon, which has already started delivering groceries in several cities in the US.

CBS News

Andy Dunn, the current CEO of Bonobos co-founded the company 10 years ago in New York. Bonobos initially started selling chino pants online. Later, its offering expanded to a full range of men’s wear. Bonobos also operates dozens of retail stores and boutiques in Nordstrom stores. Still, it continues to serve its online customers in an exceptional manner. That attracted Walmart towards Bonobos.

Walmart is gearing up for a tough fight with Amazon in both retail and online spaces. Last year, Walmart acquired Jet.com for $3.3 billion. It also gave Marc Lore, the founder of Jet.com, a mandate to expand quickly. That has resulted in the acquisition of Bonobos.

The customers of Bonobos are obviously concerned about the acquisition due to huge differences in work ethos. Bonobos has clarified that it would function in the same manner, and as of now it’s $98 chinos or $128 shirts will not be available in any of the Wallmart’s 5,000 stores. However, Bonobos would start offering its products through Jet.com.

Walmart also has spent about $166 million to acquire ModCloth and ShoeBuy.com. The company’s e-commerce revenue grew 63% on y-o-y basis in the first quarter of fiscal 2018. However, most of the growth came from Walmart.com. Even Jet.com has not generated any profit so far. The retailers in the US are facing tremendous pressure as more and more consumers are getting used to online purchases. Thus, Walmart is in the process of totally revamping its business to face the onslaught from Amazon. Thus, the big ticket acquisition by Amazon has eclipsed Walmart’s acquisition of Bonobos and the stock would remain under pressure in the short-term.

Technically, the movement of the MACD indicator below the zero line indicates an increase in selling pressure. The stock has also broken its 50-period (H4) moving average. On the downside, the next major support exists at 72.10. Thus, we can expect the stock to decline further.

To make quick gains from the downtrend, we are considering buying a put option as long as the stock trades near $76 in the NYSE. We would prefer an expiry date around June 28th for the put option.