Wal-Mart Stores expected to report decent earnings on flat revenue, may benefit from rising consumer spending

Despite a hit and miss retail environment, Wall Street analysts expect Wal-Mart Stores will have a decent quarter fueled in part by strong grocery sales. The consensus estimate is for net income to top $3.2 billion in the second quarter, just short of the $3.475 billion reported a year ago.

Earnings per share are expected to be $1.02, compared to $1.08 in the year-ago period according to the consensus of 24 analysts who follow the company. Earnings per share are expected to be 5.5% lower than a year ago. Total revenue is expected to be $120.29 billion, flat against last year.

Wal-Mart will report second quarter earnings ahead of the market opening on Thursday (Aug. 18). Wal-Mart executives are also expected to give additional financial guidance with this being the earnings report immediately following the recent $3.3 billion announced acquisition of Jet.com. Wal-Mart forecast lower earnings in fiscal 2017 through 2019 as it continued to invest in e-commerce infrastructure and wage growth among its 1.2 million employees.

For the first half of Wal-Mart’s fiscal year, revenue is expected to total $236.194 billion, up fractionally from $235.055 billion in the same period last year. Net income for the first half of the fiscal year is expected at $6.279 billion, down 7% year-over-year in part because of the heavy investments in the retailer’s e-commerce division.

Daniel Binder, an analyst with global banking giant Jefferies, expects Wal-Mart’s second quarter same-store sales to rise 1.5%, which is modestly ahead of the consensus 1%. Jefferies rates Wal-Mart a “buy” with a target price of $85. Binder believes the U.S. comp sales momentum that Wal-Mart had in the first quarter likely carried over to the second quarter. He also expects a small increase in consumer retail spending over the next few quarters thanks in part to increased wages among lower income consumers.

“Our local retail store checks continued to show strong execution with consistency across the market,” Binder noted.

Paul Trussell, an analyst with Deutsche Bank, said discount retailers like Wal-Mart and Dollar Tree are likely to benefit from a “macro backdrop supporting sustained momentum as spending prospects of the ‘low-end’ customer base improves … supported by higher spending power from lower gas prices and strong employment gains.”

Raymond James & Associates is also bullish on Wal-Mart’s second quarter results expecting $1.05 per share. They say comp sales will rise 1.1% for U.S. stores, a hair better than the retailer’s 1% forecast. Sam’s Club is expected to report flat comp sales in the quarter, according to Budd Bugatch, the retail analyst with Raymond James.

“Last quarter, food deflation adversely impacted Walmart U.S. comps by 60 basis points (.60) We believe food deflation will once again adversely impact comps this quarter. Within our basket we continue to see deflationary pressure in the meat and dairy categories,” Bugatch noted. “Management remains laser focused on boosting growth in e-commerce and the announced Jet.com acquisition underscores this. While in the long term we believe the Jet.com acquisition will allow Walmart to create a more streamlined and robust e-commerce platform, in the near term we believe there will be little impact to the top line with the potential of increased operating costs in the P&L.”

Analysts with L&F Capital Management in San Diego, Calif., noted that Walmart’s grocery business, some 55% of the retailer’s total U.S. sales, put up good numbers in the recent quarter, helped by a slowdown in quick-serve restaurants. The L&F Capital analysts believe Wal-Mart will be a beneficiary of the restaurant slowdown in the recent quarter. McDonald’s, Taco Bell, Wendy’s, Noodle’s, Sonic and Burger King all reported decelerating comp sales in this recent quarter.

“Last quarter, Wal-Mart put an emphasis on expanding its U.S grocery business. Management said the Grocery Pickup service would be available in 40 markets by the end of May (versus 22 at the start of the year) and that expansion only continued throughout the quarter, the analysts noted. “Concurrently, there was a massive slowdown in the QSR space this past quarter. The short of it is that QSR prices are inflating while grocery prices are deflating, and this discrepancy is causing consumers to choose dining-in over eating out.”

The nationwide rollout of Walmart Pay also took place in the recent quarter and management said transactions through the mobile payment alternative increased 45% in the last week of June and monthly active users jumped to more than 20 million.

“We believe the convenience of Walmart Pay, along with additional perks such as the Savings Catcher, helped drive strong traffic through Walmart’s brick-and-mortar locations throughout the quarter,” L&F Capital Markets noted.

Despite food demand, low prices and convenience offerings by Wal-Mart, analysts agree there are still some wildcards with respect to the company’s financial performance in the coming quarters. Deep discounters like Aldi and Lidl continued to expand their reach in the United States. There are continued challenges in the United Kingdom with ASDA, which has completely restructured management and operational game plans in part because of Aldi and Lidl.

Wal-Mart continues to go toe-to-toe with Visa over card acceptance, actually dropping the option in three stores in Canada. Analysts say if Walmart continues to break ties with Visa there could be some customer backlash. The retail giant also will see hefty adjustments to income from the lopsided foreign exchange rates amid the higher value of the U.S. dollar with respect to its global operations. Lastly, there is the Foreign Corrupt Practices Act investigation that continues to loom over the retail giant costing between $100 million and $120 million this year, for a total of $848 million since 2013.

Investors have seen the Wal-Mart share price rise 19.3% this year. Wal-Mart shares (NYSE: WMT) were trading at $73.32 in Monday’s (Aug. 15) afternoon session. Shares were down 57 cents on the day, but Wall Street has a target price of $84 for the retailer in the coming year.