Walmart expected to post net income decline, gains in e-commerce sales

Walmart is often seen as a stalwart in a challenging economy because it has the the scale and resources to manage shrinking margins. That’s primarily why equity analysts expect Walmart on May 17 to report quarterly net income of $4.19 billion on slight declines in net margins.

Net income is estimated to be 13% lower than a year ago because of divestitures. Revenue is forecast at $128.8 billion, an estimated drop of $10 billion because of business divestitures in the United Kingdom, Japan and Argentina. Walmart’s international segment revenue is forecast at $25.5 billion, down 6.5% year-over-year, with a 7.4% negative impact from foreign currency exchange rates.

U.S. comp sales are forecast to rise 2%, down from the 6% growth reported a year ago. Sam’s Club is expected to comp sales of 6.1%, narrowing from 7.2% gains a year ago. Walmart’s gross margins are under pressure from higher labor costs, rising transportation costs and inflation. Analysts expect gross margins of 24.2% for the quarter, down from 24.7% a year ago. Net margins are expected at 3%, narrowing from 3.4% in the same quarter last year.

“Walmart has been demonstrating its ability to temper gross margin contraction in recent quarters as a result of improved merchandise mix and strategic sourcing, but the first quarter represents the most difficult comparison of the year. We expect management to continue to improve eCommerce profitability, supporting sustainably higher margin rates,” noted Ben Bienvenu, an analyst with Stephens Inc. (Stephens conducts investment banking services for Walmart and is compensated accordingly.)

Walmart’s e-commerce business is expected to contribute 1.2% to the comp-store sales growth for the U.S. segment. Market watchers forecast U.S. e-commerce sales to grow 10% from a year ago. Sam’s Club is expected to see a 35% e-commerce growth from a year ago. E-commerce is forecast to contribute 3.2% to the segment’s comp sales growth.

Walmart continues to seek profitability improvements in its e-commerce business and grow other revenue streams from its in-house advertising business, final mile delivery platform and health and financial service offerings.

Bienvenu is a little more bullish on Walmart than the broader analyst consensus. His earnings forecast is 2.7% higher than consensus and he maintains an “overweight” or buy rating on the retail giant’s stock.

“Against a persistently elevated inflationary backdrop we continue to view Walmart shares as attractively valued, given the company’s position as the largest EDLP (everyday low price) retailer. We believe the current operating environment plays into Walmart’s strength, which should allow for it to outperform relative to its peers. Walmart has often been characterized as an ‘inflation fighter’ with the company’s scale allowing it to push back against vendors to mitigate price increases. While there are certainly limits to this, and we don’t expect the company to irrationally price, we believe Walmart’s relative pricing gap will be an attractive draw for consumers feeling inflationary pains in their wallets,” Bienvenu said Thursday.

He also likes Walmart’s ability to generate additional revenue in e-commerce, advertising and healthcare. Bienvenu has a target price of $170, which has a 14% upside potential for the $149.10 level Walmart shares (NYSE: WMT) were trading Thursday. Walmart shares are up 3.21% year-to-date after falling more than 7% after major market sell-offs began in late April.

Market watchers will also look for commentary on consumer behavior in the Walmart earnings report as the retail titan serves 230 million customers a week across its global operations.

“Consumers have seen little reprieve from rising prices in 2022 as many CPG companies have implemented multiple price increases to try and offset elevated transportation, raw material and labor costs. As consumers go in search of value and try to stretch their paychecks further Walmart is well positioned to benefit from increased store traffic,” Bienvenu noted.

Not all analysts are bullish on Walmart amid the present economic challenges. Analysts with KeyBank Capital Markets recently lowered their “buy” rating for Walmart stock to neutral. KeyBank Analyst Edward Yruma expects Walmart to see wage pressure and other factors pressuring top line sales.

“In recent years, Walmart has undergone a transformation into arguably one of the strongest
omnichannel U.S. retailers. However, we believe the lack of stimulus tailwinds and continued inflationary pressure may disproportionately impact Walmart’s middle of the middle U.S. consumer in the near term,” Yruma recently noted.