A woman pays for her purchases at a Wal-Mart store in Mexico City. Investors are anticipating that the lowest crude oil prices in four years and the highest consumer confidence since 2007 will boost holiday sales for chain stores including Wal-Mart.

Bloomberg

As falling gas prices and growing job market afford consumers more spending cash heading into the holidays, investors are positioning for retailers like Wal-Mart Stores to reap the benefits.

Demand for options that protect against future losses in Wal-Mart shares fell to the lowest level in more than five years relative to bullish ones, data compiled by Bloomberg show. Ownership of put options conveying the right to sell an exchange-traded fund tracking retail stocks has fallen to the lowest since May compared with calls giving the right to buy.

Investors are anticipating that the lowest crude oil prices in four years and the highest consumer confidence since 2007 will boost holiday sales for chain stores. With its focus on shoppers in lower income brackets, Wal-Mart is particularly well-positioned to thrive this holiday season, according to Walter Todd of Greenwood Capital Associates.

“Wal-Mart’s customer base benefits more than anyone from the drop in gasoline,” Todd, who oversees about $1bn as chief investment officer for Greenwood, South Carolina-based Greenwood Capital Associates, said in a Nov. 17 phone interview. “You’re seeing confidence in the retail sector as a whole increase as gas prices fall. It makes sense that people would be inclined to be positive on the space heading into the holiday season given that backdrop.”

The National Retail Federation has said holiday spending will rise 4.1% this year, beating last year’s 3.1% gain. The season is key for retailers, with sales in November and December accounting for about 19% of annual revenue, according to the NRF. Retail shares have already started climbing amid a decline in crude oil prices. The SPDR Standard & Poor’s Retail ETF, which tracks the benchmark gauge’s Retail Select Industry Index, has surged 13% since falling to a more than four-month low in October.

Crude oil has slipped 12% over the same period. In addition, as of November 20, the national average price of regular gas was down 23% from this year’s high, set on April 26, according to the American Automobile Association.

The lower gas prices “should help lower- and middle-income consumers, given the relative role of energy in consumer budgets,” a group Goldman Sachs Group Inc analysts led by Matthew Fassler wrote in a November 14 note to clients. “Wal-Mart should be a key beneficiary of this dynamic.”

Contracts betting that Wal-Mart shares will decline 10% cost 2.25 points more than those wagering on a 10% increase, according to one-month options data compiled by Bloomberg. The price relationship known as skew fell on November 11 to the lowest level since May 2009. The measure has averaged 7.02 points over the past two years.

Wal-Mart stock has already climbed 11% this month, including a 4.7% increase on November 13 after the world’s largest retailer posted third-quarter earnings that beat analysts’ estimates after the company paid less in taxes and US same-store sales grew for the first time in seven quarters.

Gains for retailers were also reflected in consumer confidence that rose more than forecast in November to a seven- year high. The Thomson Reuters/University of Michigan preliminary sentiment index increased to 89.4 for the month, exceeding the highest estimate in a Bloomberg survey and touching the strongest since July 2007.

We’ve seen “continued lower gas prices and higher consumer optimism,” Eric Beder, a New York-based analyst at Wunderlich Securities Inc, wrote in a November 18 client note. “The imminent holiday season should compare more favourably than to last year, with a harsh winter that paralysed much of the industry.”

Still, the holiday shopping season is highly competitive, which has led many retailers to start offering deep holiday discounts earlier than ever before, which can cut into margins, according to Beder. Wayne Hood, an analyst at BMO Capital Markets, lowered his rating on Wal-Mart to underperform on November 14, citing concern over the company’s long-term earnings-per-share growth potential. Wal-Mart’s sales growth in the third-quarter came at the expense of the company’s profit margins, he said.