Higher second quarter net income, ongoing traffic gains expected for Wal-Mart Stores

Wal-Mart Stores is expected to be one of the winners in the volatile retail sector with second quarter earnings predictions reaching $3.2 billion in consolidated net income, or $1.07 per share, according to the consensus of 29 analysts polled by Thomson Reuters.

The Bentonville-based global retailer is set to report earnings on Thursday (Aug. 17) ahead of the market open.

Wal-Mart’s per share earnings guidance for the quarter ranges from $1 to $1.08 led by continued improvement in its U.S. segment and positive same-store sales growth between 1.5% and 2%. The retailer also expects positive traffic comps which would make 11 consecutive quarters for this important metric.

The earnings per share prediction is flat with a year-ago but overall net income is expected to be hindered slightly from higher selling and administrative costs as well as an uptick cost of goods sold. A year ago net income totaled $3.335 billion.

Sales revenue is expected to be $122.86 billion, up 1.7% from a year ago, according to the Wall Street consensus. The Wal-Mart forecast is one of the more positive stories unfolding in the retail sector. The department stores reporting earnings last week delivered lackluster results, declining same-store sales and more store closures on the horizon.

Wal-Mart is seen by Wall Street as one of the winners this go-around fending off threats such as the Amazon-Whole Foods deal, expansion of Aldi and Lidl footprints as well as competitive pricing war with Kroger in key markets.

BULLISH PLAY
A retail analyst on the sidelines for several quarters recently jumped on the Wal-Mart bandwagon, saying the retailer’s investments in lower prices, store-labor improvements and e-commerce capabilities should be enough to give Wal-Mart some earnings momentum.

Ben Bienvenue, an analyst with Little Rock-basede Stephens Inc., recently upgraded Wal-Mart Stores from equal weight or “hold” to an overweight or “buy” recommendation. He said in recent quarters Wal-Mart’s earnings valuations were too expensive for his taste. But in an Aug. 10 report to investors Bienvenue said Wal-Mart has moved from playing defense to playing offense. (Stephens Inc. performs investment banking services for Wal-Mart and is compensated accordingly when doing so.)

“Retrospect suggests that the company took one step backward in order to take two steps forward. We think Wal-Mart is now one of the better positioned operators in today’s rapidly changing retail landscape. Even with the recent increase in the stock price we believe this is an attractive entry point for shares given what we see as a path to accelerating earnings next year,” Bienvenue noted in the report.

He said Wal-Mart’s leadership in grocery, which is being connected to the online marketplace, puts the retailer in front of many competitors. He also said Wal-Mart’s ability to sacrifice gross margin to lower prices and drive positive in-store traffic while also increasing its exposure to higher margin sales online through the recent acquisitions of ModCloth, ShoeBuy, MooseJaw and Bonobos elevates the retailer among its peers.

“We think that we are approaching an inflection point for the company – the lion’s share of necessary investments in the customer have been made and we believe that recent strong results should continue,” Bienvenue said.

GROCERY SECTOR
Part of Wal-Mart’s mission is to be the world’s largest grocer and the U.S. is an important market for the retail giant as grocery accounts for around 56% of the Walmart U.S. sales revenue.

The U.S. market recorded deflationary food prices during the past 19 months but reversed the trend in July, according to The Food Institute. Food inflation is often a positive for retail sector revenue but Barclay’s retail analyst Karen Short recently said it may not be the case because Wal-Mart and Kroger are more aggressive in their food pricing.

Short said lingering deflation has helped to create one of the most difficult operating environments for food retailers. She said some grocery retailers will benefit from inflationary pricing such as Whole Foods and Sprouts Farmer’s Market but for discount retailers trying to hold market share inflationary help is mute.

Oppenheimer Equity Research analyst Rupesh Parikh, who recently began following Wal-Mart Stores, gave the retailer a positive rating of “Outperform.” He said Wal-Mart is positioned to gain share in grocery with improving in-store execution and aggressive investments in expanding online grocery. He said the free two-day shipping with the $35 minimum order for general merchandise and experimentation with home delivery puts the retailer in a position to capture share as consumer preferences change.

TARGET PRICES
Wal-Mart shares (NYSE: WMT) have been on a bull run in recent weeks. Following the initial shock the of the Amazon deal to buy Whole Foods, Wal-Mart shares rallied from $73.23 on July 10 to $80.85 in the afternoon session Monday (Aug. 14). Wal-Mart shares are up 17% year-to-date, but Bienvenue and Parikh say the rally isn’t over.

Bienvenue raised his target price for Wal-Mart to $91 on the basis of improved earnings growth into next year. He likes the consistent shareholder returns that investments in Wal-Mart provide. He said Wal-Mart continues to generate consistent free cash averaging 6.1% over the past five years in part by lowering inventory costs and disciplined capital expenditures. Bienvenue expects the retailer’s ability to grow its free cash bodes well for supporting dividend growth, share repurchases and accretive acquisitions.

Parikh in his coverage initiation of Wal-Mart Stores gave a target price of $90 based on higher earnings per share next year after what he believes will be a mostly flat 2017. Parikh expects in the next two years to see top line growth lapping a multi-year period of e-commerce investments as well as accretion from share buybacks and waning foreign exchange expenses to fuel earnings growth.