Wall Street estimates third quarter income dip for Wal-Mart, gain in same-store sales

Wal-Mart Stores reports third quarter earnings early Thursday (Nov. 16) and Wall Street consensus is 97-cents per share, or $2.902 billion in net income. This would be a 1% decline from the 98 cents per share earned in the year-ago period.

Analysts expect revenue of $120 billion, improving about 2.3% from the $118 billion reported a year ago. For the retailer’s U.S. segment, revenue is expected to be $76.7 billion, up 2.9% year-over-year. Likewise, Sam’s Club revenue is projected at $14.5 billion, up 2.5% annually, while the Walmart International segment revenue estimate is $28.5 billion, up less than 1% from the year-ago period.

Same-store sales are expected to be up 2% for the Walmart U.S. stores which would be an improvement from the 1.2% gains a year ago. Sam’s Club comparable sales are expected to up 1.4%, even with the year-ago figure.

Shares of Wal-Mart Stores (NYSE: WMT) have been on a bull run since early October setting a new 52-week high Friday (Nov. 10) at $91.69 before closing at $90.92. Since the beginning of this year Wal-Mart shares are up nearly 32%. In the past quarter the share price is up 13.5% with over half of that gain coming since early October following the retailer’s annual meeting with the investment community.

Ben Bienvenue, an analyst with Stephens Inc., expects Wal-Mart to do a little better than the consensus and has pegged third quarter earnings at 98 cents a share.

“We believe the company can continue its strong execution seen year-to-date, and deliver results ahead of consensus expectations. Management is progressing along a path toward mid-single digit earnings growth next year and we believe the third quarter should provide more evidence of the achievability of this goal,” he said.

Bienvenue said the momentum of top-line trends at Walmart U.S. and Walmart.com offers an opportunity for the company to reach an inflection point for leveraging the model over the next several quarters. He referenced Wal-Mart’s strong free cash flow and the strength of the business offering and management flexibility as allowing the company to continue to expand its portfolio of digital assets overtime.

That said, Bienvenue expects to Wal-Mart’s overall gross operating margins to be flat. He remains overweight on Wal-Mart shares with a price target range between $91 and $98. That optimism takes into account Bienvenue’s expectations Walmart.com will continue to be a growth engine.

Wal-Mart also is “anniversarying its well-publicized wage investments of the past years and we continue to believe that as Walmart drives stronger same-store sales growth, it has the flexibility to either increase its price investments or leverage operating expenses. We have seen a significant step down in operating expense deleverage the last two quarters, and moving into the back half of the year we expect this to continue,” Bienvenue said.

Bienvenue said Wal-Mart is one of the best positioned retailers to do well in the all-important holiday season that consumes the fourth quarter.

Charles O’Shea, retail analyst for Moody’s, said the department store battle is a tough one especially for stores located in shopping malls. Macy’s reported dismal sales, Kohl’s reported slightly positive store comps and said foot traffic is starting to trend up. JC Penney also reported same-store sales up 1.7%, better than the 0.5% estimates.

O’Shea said this holiday is shaping up to be very promotional. He based that on the recent Amazon earnings release showing the company is promoting to grow its top line revenue using price as the weapon. O’Shea said Wal-Mart is doing the same thing and there is going to be collateral damage.

“From Wal-Mart to auto part stores each grew their store counts aggressively over the past decade and very few have thinned the herd since then. The U.S. retail space is over capacity and there will be retailers that don’t survive,” he said.

O’Shea warned the weakest competitor could be the most difficult because they have nothing to lose. He Sports Authority prior to filing bankruptcy slashed prices and that took sales from Dick’s Sporting Goods and Academy. He said once a chain goes out of business the competitors may regain some share but it’s not always easy.

“This holiday you may see desperate promotions from those retailers who are just trying to survive,” O’Shea said. “Target, Wal-Mart and Kohl’s are poised to do a little better than those stores in malls. The fourth quarter could be an acid test for some department stores,” he warned.

Several analysts downgraded Wal-Mart shares to a hold or neutral position this summer as the stock price began to rise after its solid earnings report in August. The retail sector has been a mixed bag with more losers than winners in 2017. Wal-Mart is in an elite position as a retailer reporting positive store comparable sales and store traffic while also seeing strong online sales growth. Analysts largely believe this reality has already been factored into the stock price.

O’Shea said Wal-Mart is trying lots of things in its stores and online divisions but it’s too early to know what will make a big difference and what won’t. He said given Wal-Mart’s massive size it takes a lot to move the needle, but he applauds the effort.

Institutional investors have added to their Wal-Mart share holdings on the heels of the retailer’s recent authorization to repurchase $20 billion in shares made by the company’s board of directors. In the past three months the Walton family and other insiders have sold 9.924 million shares valued at $785.68 million. To date 51.39% of Wal-Mart’s outstanding stock is owned by insiders, slightly less than 50% of that is held by the Walton family.