Wall Street optimistic on Wal-Mart and consumer spending in back half of 2016

Wall Street was closely eyeing the results of retail giant Wal-Mart Stores and its second quarter earnings report Thursday (Aug. 18) on the heels of disappointing results from Target the previous day. They liked what they saw.

Wal-Mart’s strong second quarter performance, particularly in its U.S. segment and the positive sentiment the retailer gave for the third quarter, were enough to push shares (NYSE: WMT) up about 2% in heavy trading in the Thursday’s morning session. The share price would eventually settle at $74.30, up $1.38, or up 1.89%. During the past 52 weeks the share price has ranged from a $74.80 high to a $56.30 low. In pre-market trading, the share price was rising above the 52-week high.

The retailer also raised its full-year earnings guidance to between $4.15 and $4.35 a share from a previous range of $4.00 to $4.30. This forecast includes a 5-cent per share ding from the pending acquisition of Jet.com which is expected to close later this year.

U.S. STORE STRENGTH
Walmart U.S. CEO Greg Foran told the media during an earnings call that the higher comps for sales (1.6%) and traffic (1.2%) are a result of in-the-trenches work to improve store execution on everything from fresh offerings, convenient checkouts, better in-stocks and lower inventory levels (down 6.5%). He said it’s like the gearing in a Swiss watch, all the little things when done correctly add up to more than their sum parts.

Foran said the retailer’s efforts to have cleaner, more friendly stores are gaining traction. He said the 1.2% bump in store visits and the 0.4% increase in average basket size show that regular customers are shopping more often and picking up an extra item or two. He said the retailer hopes store improvements will eventually draw new traffic away from competitors. However, the first indication the tactics are working is that regular customers responded.

He said the turnaround for U.S. stores is still in its early stages but the second quarter results indicate that the retailer is making progress on the multi-year plan.

Ben Bienvenue, retail analyst with Stephens Inc., told Talk Business & Politics the low-end consumer appears to be resilient, in part because of sustained lower gasoline prices. He also said management’s decision to raise hourly pay is working as it puts a little more money in the hands of its employees who likely spend it at Walmart.

PRICE EVALUATION
He said Wal-Mart Stores outperformed his expectations and all of the retailer’s metrics are under review by the Little Rock-based investment firm. That said. Bienvenue adds that the price at $74.40 is a little on the high side relative to the 17-times earnings expected over the next year. He said the broader S&P index has an earnings multiple of 21 times, so there is perhaps a slight discount to Wal-Mart shares. Bienvenue attributed that discount to the lower earnings Wal-Mart forecast through 2018 amid its heavy investments in ecommerce and personnel. (Stephens conducts investment banking services with Wal-Mart and is compensated accordingly.)

Recently investor Warren Buffet’s Berkshire Hathaway reduced its stake in Wal-Mart Stores by selling 15 million shares. The investment conglomerate now holds 40.2 million shares of Wal-Mart Stores in its portfolio. Wall Street attributed this move as taking profits off the top given the nearly 19% increase in the share price this year.

While the price may be considered a little high by some, Budd Bugatch, analyst with Raymond James & Associates, sees more upside for the retail giant. He too will revise his outlook for Wal-Mart stock based on Thursday’s report. His current target price is $80 per share, but he told the media that the high-end of his range is around $86.

Bugatch’s positive sentiment comes with the good financial results from the top to the bottom. He especially liked the improvements in the retailer’s e-commerce sales which were up 11.8%, after just a quarter earlier management was disappointed with the segment. He said the retailer’s efforts to grows its online inventory from 8 million items to start the year to more than 15 million now is likely one of the reasons sales are up.

Bugatch said it’s good to see the e-commerce pace accelerating, he reminded investors that the 4,600 stores are the “big dog” for the retail behemoth. For now the investments in people and convenience propositions like Walmart Pay and Grocery Pick-up are beginning to pay off, according to Bugatch.

POSITIVE MOMENTUM
Wal-Mart Chief Financial Officer Brett Biggs told the media that their view on consumer sentiment has been steady because they have not seen a marked change in consumer behavior over the past several quarters. He said lower gasoline prices, food deflation and low interest rates are all positives for consumers. Biggs attributed the solid consumer sentiment as one of the reasons for improved traffic counts at Walmart U.S.

Foran said the uptick in store traffic has been evenly balanced across all demographics and between formats. The executives reported no cautionary sentiment displayed by consumers regarding the pending presidential elections.

Dana Telsey of the Telsey Advisory Group said Wal-Mart’s positives in the recent quarter were just part of the story given their outlook for the third quarter was also good. Telsey said it looks as if Walmart U.S. has a handle on their in-store operations across the box, not just with fresh food offerings, but also in other areas, including improvements in fashion trends with apparel.

CAPITAL ALLOCATION
Wal-Mart management gave few details on the pending Jet.com acquisition which is expected to close by the end of the year. Bienvenue said it’s still a wildcard in terms of the impact the $3.3 billion expenditure will have on the retailer’s overall results. He said Wal-Mart continues to shift its capital allocations and the large purchase was unanticipated by many. That said, he agreed that Wal-Mart’s strong financial balance sheet allows such expenditures.

The hefty spending calls into question whether or Wal-Mart will continue its aggressive stock repurchase initiative introduced late last year and expected to run through 2019. Wal-Mart CEO Doug McMillon has not mentioned any modifications to the repurchase plans except to say the company repurchased 30.3 million shares for approximately $2.1 billion in the recent quarter. At of the end of the second quarter, the retailer has utilized approximately $7.3 billion of its $20 billion share repurchase authorization.

Analysts expect the retailer to give more clarity on its repurchase program in the upcoming meeting for the investment firms which will be held in Bentonville Oct. 5-6.