Walmart expected to report 12.9% growth in second quarter earnings

Wall Street is bullish on Walmart and expects double-digit earnings growth of 12.9% when the retail giant reports its fiscal second quarter results on Thursday (Aug. 16) ahead of the market opening.

The consensus of 26 analysts peg net income at roughly $3.6 billion, or $1.22 per share. That compares to $3.269 billion or $1.08 per share in the year-ago quarter ending July 31. Revenue growth of 2.2% is expected with total sales of $126 billion for the three months ending July 31.

Ben Bienvenue, an analyst with Little Rock-based Stephens Inc,. expects second quarter earnings at $1.21 per share, just shy of the consensus. That said, Bienvenue believes solid results will push the stock price higher as “a broadly improving consumer backdrop coupled with continued improvements in-stores should sustain recent comp sales momentum in the U.S. market.”

In a note to investors Bienvenue said Sam’s Club growth should be conservative compared to the surprising upside realized in the first quarter. He said the international segment continues its reorganization efforts which should help Walmart maximize efficiencies and drive long-term return of invested capital. He’s confident Walmart can hit its 40% annual growth target for e-commerce given the unit’s resurgence in the first quarter after a disappointing fourth quarter of 2017. He said the pending acquisition of Flipkart could pressure the stock, but the consensus expectations have already priced that into the forecast. Stephens is overweight on Bentonville-based Walmart with a target price of $108 per share.

Walmart U.S. is expected to see same-store sales growth of 2.3% in the quarter ended July 31. Sam’s Club comp sales are expected to rise 2.2%, though Stephens has them lower noting the loss of tobacco sales in certain club locations will likely show up in the quarter. Bienvenue expects Sam’s Club will see only slightly positive second quarter comp sales of 0.5%.

Bienvenue said the continued expansion of Walmart grocery pickup to 1,000 stores this year will support e-commerce momentum because the transactions carry a higher average basket than in-store shoppers. The retailer’s international business is evolving for the better, he notes. The recent sale of 80% of its Brazilian business to Advent International closed Aug. 1 and should create a non-cash, discrete net loss of $4.5 billion for Walmart.

The bulk of Walmart’s profits are wrapped up in its massive U.S. segment where the retailer remains focused on price leadership among its competitors. The Stephens’ weekly online pricing survey between Walmart and Kroger looks at 30 items and found price gaps expanded in Walmart’s favor to 7.9% in the second quarter. Stephens said the pricing gaps were most noticeable in meat, bread, grocery and packaged foods where discounts widened from the first quarter. The report also found the price separation narrowed between Kroger and Walmart in the fruit, vegetable and dairy categories.

Stephens expects Walmart’s gross operating margins to dip to 4.2% in the quarter, down from 4.7% a year ago.

Not all the analysts covering Walmart are as optimistic as Bienvenue. Credit Suisse analysts said they are concerned about earnings growth overall despite some positive trends through the quarter. Seth Sigman, an analyst with Credit Suisse, said growth in private label share and grocery are solid, but he’s neutral on the stock with a price target of $85.

“We struggle with the path to higher earnings per share as cost pressures and e-commerce investments continue, implying upside needs to come from valuation,” Sigman wrote in a recent note to investors. “While e-commerce investments were initially expected to peak in FY18, management suggested that losses could worsen again in FY19 due to additional investments as well as freight.”

J.P Morgan analysts are also sitting on the fence with a neutral rating of Walmart shares and a price target of $87. Christopher Horvers, an analyst with J.P Morgan, said Walmart’s investments in e-commerce initiatives are paying off, but are likely coming at the expense of medium-term profits. He said Walmart’s large market share combined with a majority of profits coming from the lower-margin grocery business make transitioning to higher growth more difficult.

Analysts do agree that Walmart seldom misses on earnings having beat expectations 10 of the past 11 quarters. Walmart is also an overachiever on revenue having exceeded expectations for the past four quarters. That said, Walmart shares are down 9.1% year to date. Shares of Walmart Inc. (NYSE: WMT) closed Monday (Aug. 13) at $89.64, down 54 cents. For the past 52 weeks the share price has ranged from $77.50 to $90.54.

Economists and retail insiders remain optimistic for the retail sector and it’s largest player Walmart through the balance of this year. The National Retail Federation recently updated its annual forecast for retail sales, excluding automobiles, gasoline and restaurants. The trade group expects sales at retailers to grow 4.5% this year, up from the prior 3.8% forecast.

“Higher wages, gains in disposable income, a strong job market and record-high household net worth have all set the stage for very robust growth in the nation’s consumer-driven economy,” NRF President and CEO Matthew Shay said in a statement. “We knew this would be a good year, but it’s turning out to be even better than expected.”

Shay said uncertainty remains on the impact on tariffs. The primary concern is inflationary prices in the U.S. and while that takes a toll on consumers, retailers like Walmart tend to do a little better in periods of low-to-moderate inflation which drives higher top line revenue. Given Walmart’s scale, the retail giant has said it can get more price separation against competitors which there is some inflationary pressure.