Wall Street expects Wal-Mart to report reduced third quarter earnings, 1% revenue gain

Margin compression and increased spending on e-commerce capabilities is expected to dampen Wal-Mart Stores’ third quarter earnings by about 7% compared to a year ago.

The retail behemoth is expected to post adjusted net income of $2.972 billion ahead of the New York Stock Exchange opening bell on Thursday (Nov. 17). The estimate is lower than the $3.204 billion earned in the year-ago period. For the three months ending Oct. 31, third quarter consensus is 96 cents per share,  down from $1.03 a year ago, according to Yahoo! Finance.

Revenue is expected to grow 1% to $118.61 billion, according to the consensus. Walmart U.S. is expected to report $74.667 billion in third quarter net sales, up from $72.712 billion a year ago. Comp sales are forecast by Wall Street to be 1.4% for Walmart U.S for the 13-week period, down from year ago comp sales of 1.5%.

Analysts with Barclays anticipate net margin compress of about 0.40% with U.S. store comparable sales growth of 1.3% tied to decent store traffic resulting from higher consumer scores for the retailer and additional consumer spending. On the flip side, the analysts said food deflation and competition from discounters as well as Amazon will pressure earnings and comps in the near term.

Wal-Mart’s own earnings guidance ranges from 90 cents to $1 per share, lowered in light of the retailer’s hefty e-commerce investments to the tune of roughly $6 billion in the span of two years, including the Jet.com acquisition and increased stake in JD.com.

Analysts say the e-commerce investments are important for future growth, though they will temper shorter term profits. The Selerity Group recently noted to its clients that Wal-Mart over the past four quarters has beaten the Wall Street consensus by an average of 5 cents per share, which has helped fuel the stock price to a lofty level given the retailer’s own cautious guidance.

“With the economic expansion having entered the eighth year, retail and other cyclical industries would normally be expected to struggle amid late-cycle pressures. Analysts seem obsessed with an online battle with Amazon but consumers generally look to Walmart for daily products and Amazon for less mundane items. Walmart’s online efforts would seem to be a positive with huge potential in any case,” noted Craig Bowles of Selerity Group.

One of the more bullish analysts for Wal-Mart Stores is Budd Bugatch of Raymond James & Associates. Bugatch continues to rate Wal-Mart Stores as a “strong buy” despite the lower earnings Wal-Mart forecast through next year. Bugatch remains “convinced that Wal Mart’s management is focused on the correct long-term U.S. strategy: (1) fix the customer experience in the stores, (2) make e-Commerce/store shopping seamless, (3) improve the fresh/deli food presentation, and (4) thoughtfully expand the Neighborhood Market format.”

“Admittedly, the lack of near-term earnings growth stretches Wal-Mart’s valuation on a multiple basis versus its historical range. Nonetheless, we are steadfast in our belief that management’s actions will continue to drive traffic and comp sales growth, and based on our intrinsic value analysis, we believe the reward in owning shares still outweighs the associated risk,” he continued.

Bugatch said his team did trim their initial third quarter earnings back from 97 cents a share to the 96-cent consensus based on the near-term operating losses related to the Jet.com purchase. However, he expects the Jet purchase will help accelerate Wal-Mart sales growth by as much as 20% over the next two years beginning at the tail end of this year.

Next year’s earnings growth according to Wal-Mart Stores CFO Brett Biggs will be hammered by expenses related to the Jet purchase and other e-commerce expenses as well as foreign currency pressures. The retailer slashed its earnings predictions for next year from 10% growth forecast last year down to 5% earnings growth for fiscal 2018, which begins Feb. 1, 2017.

Bugatch said Wal-Mart has the potential to grow the online customer basket and essentially create the digital version of a supercenter. He said such digital growth is something the retailer must achieve to drive sales growth over the coming years.

“Admittedly, the slowdown in U.S. new store growth over the next few years implies a greater contribution from comparable and e-commerce sales growth and creates some investor skepticism. Walmart has not delivered U.S comparable sales growth above 2% since late 2012. Nonetheless, we think there remains a significant opportunity for management to drive sales growth by improving the performance of the company’s  underperforming supercenters,” Bugatch added.

Sam’s Club is expected to have negative comp sales including fuel and only slightly positive (0.3%) comps without the fuel impact. Sales at Sam’s Club excluding memberships are expected to top $14.122 billion, up fractionally from $14.075 billion a year ago. Like Walmart U.S., Sam’s Club’s operating margin declined slightly from a year ago.

Wal-Mart’s international division is expected to see modest growth fueled by core markets of Mexico and Canada showing solid returns. Investments remain heavy in China and could take a time to pay off, and Asda in the United Kingdom is also struggling. Brazil remains in recession and Japan is moving in that direction.

Shares of Wal-Mart Stores (NYSE: WMT) opened the week lower trading at $70.45 at midday on Monday (Nov. 14). Shares were down 1.08% from last week’s close. Shares have ticked up from the $67 level in mid October just prior to the retailer’s meeting with Wall Street analysts. Over the past 52-weeks the share price has ranged from $56.36 to $75.19. Year-to-date Wal-Mart shares are up 14.62%.