Retail watchers bullish on Walmart ahead of third-quarter earnings

Walmart has been one of the darlings of Wall Street amid the COVID-19 pandemic and analysts remain bullish on continued growth in the coming quarters. The Bentonville-based retailer is expected to report Tuesday (Nov. 17) third-quarter earnings of $1.18 per share, up 1.72% from a year ago with revenue up 3.2% to $132.05 billion.

Net income is pegged at $3.54 billion, up 6.62% from the prior-year period despite lower gross margins because of higher operating costs.

Walmart is seen as one of the retail winners in recent months as an essential U.S. grocery provider. The stores remained open and busy while other retailers were forced to close their doors.

U.S. sales are expected to top $86 billion, up 3.3% from the year-ago period while out-of-stocks remain a problem across the enterprise as supply chain hiccups continue. CEO Doug McMillon was recently asked if he could fix any problem within the company in an instant what that would be and he said the out-of-stocks.

Sam’s Club is also expected to post strong sales growth with revenue of $15.46 billion in the quarter, a gain of 5.7% from a year ago. Sam’s Club launched a virtual healthcare care subscription in the recent quarter in a partnership with 98point6. The retailer also recently partnered with DoorDash for same-day prescription deliveries for U.S. members.

International division revenue is expected to be lower at $28.4 billion, compared to $29.16 billion a year ago. Walmart continues to reduce international holdings. The company sold a majority stake in Asda (United Kingdom) in October and more recently announced the complete divestiture of Walmart Argentina. The transactions are expected to close in 2021. Walmart expects to take a $2.5 billion loss on Asda and a $1 billion loss from the sale of Walmart Argentina next year.

BULLISH OUTLOOK
Ben Bienvenu, an analyst with Stephens Inc., recently raised his earnings estimate for Walmart’s third quarter to $1.25 per share based on increased growth assumptions from Walmart U.S. and Sam’s Club. He expects the U.S. e-commerce segment to grow 60% from a year ago, contributing 3.6% to the comp-store sales growth.

For Sam’s Club, Stephens is modeling 30% e-commerce revenue growth which would contribute 1.9% to comp-store sales growth in the quarter. He said currency rates will hinder international sales growth pushing revenue 2.6% lower. Bienvenu also expects gross margins across the business to be flat with a year ago at 24.5%.

“We think Walmart is well-positioned to advance its strategic initiatives in the midst of and in the wake of COVID-19, and as the e-commerce business continues to scale, we expect shares to increasingly reflect the value of the business. … As we move through the next several quarters and hopefully transition out of a COVID-19 environment, we think Walmart’s value proposition to customers will increasingly resonate as the company leans into attractive price points and offers more services to reduce transaction friction,” Bienvenu noted Nov. 10.

He said Stephens reiterated its “overweight” or “buy” rating with a price target of $160. (Stephens conducts investment planning services for Walmart and is compensated accordingly.)

FAVOR FOR TARGET, COSTCO
Half of the 32 analysts covering Walmart shares rate the stock a “buy” as of Nov. 11. The other half are neutral. The consensus price target among the 32 analysts is $148.20, close to the Thursday’s trading price. Analysts with KeyBanc maintained their overweight rating on Walmart shares Thursday raising its price target to $155.

Analysts with Gordon Haskett recently reiterated Walmart shares as “accumulate” with a price target of $150. This rating sits between a “buy” and a “hold.” The analysts see a 3.1% upside potential in the share price over the next year, which is below the 17% upside they see in competitor Target and 9% growth they predict for Costco.

Gordon Haskett is somewhat bullish on holiday sales saying consumers will likely spend some of their savings derived from less travel and personal consumption. Walmart is not among Gordon Haskett’s top picks for holiday winners. The analysts favor Target and Costco as well as discounters Five Below, Burlington and Ross.

The analysts see Walmart underperforming Target and said the adoption of online grocery and the broadening of Walmart’s customer base during the past 8 months and the potential for Walmart+ to gain steam keeps them engaged in Walmart and watching. Gordon Haskett forecast third-quarter earnings of $1.15 per share from Walmart, 3-cents lower than the consensus.

Walmart shares (NYSE: WMT) closed Thursday (Nov. 12) at $148.23, up 25 cents. During the past 52 weeks, the stock has traded between $102 and $151.33. Walmart shares have rallied nearly 24% since the first of the year, with the bulk of that growth taking place since early July.