Net income could fall by 7.7% in Walmart’s fiscal third quarter

Analysts at Citibank and Stephens Inc. believe Walmart will slightly outperform consensus when the retail giant reports third-quarter earnings on Tuesday (Nov. 15), but they say net income will be lower thanks in part to continued pressure on margins.

Walmart is expected to report net income of $3.64 billion, or $1.32 per share, for the third quarter, down 7.7% year-over year. For the quarter ending Oct. 31, Walmart is also expected to report revenue of $140.525 billion, up 4.3% from a year ago. Gross profit margins continue to be narrow because of inflation.

The consensus estimate indicates the key metric of Walmart same-store sales to be up 3.7% at for the quarter. Sam’s Club is expected to report same-store sales growth at 8.2%. E-commerce sales growth is projected at 25% from the year-ago quarter adding 2.9% of the Walmart U.S. same store sales. Sam’s Club is expected to see e-commerce sales growth of 30% adding 2.7% to the comp-store sale growth in clubs.

Stephens Inc. is bullish on Walmart shares despite share price declines in recent months. Stephens analysts Ben Bienvenu expects gross margins to be down 1% year-over-year to 23.6% and operating income margins to be down 0.46% year over year to 3.7%. He said the margin compression relates to a shift away from general merchandise to food along with the excess inventory levels requiring more markdowns. (Stephens conducts investment banking services for Walmart and is compensated accordingly for that service.)

Economists with Wells Fargo Securities say plenty of consumers are still grappling with significantly higher prices for food and fuel compared to a year ago through the October Consumer Price Index (CPI) report on Nov. 10.

“Higher prices coupled with a challenging environment and higher interest rates have caused consumers to take a good hard look at their budgets to prioritize what is most important. As consumers seek value and work to stretch the paychecks further, we believe Walmart is well positioned to benefit from increases during the previous recessions,” Bienvenu reported.

Bienvenu has a one-year target price of $165 on Walmart shares. The broader consensus estimated is a more conservative at $152.94.

Walmart’s performance during the 2001 recession included a 8.1% share price gain from March 2001 to Nov. 11, compared to the 12.7% In 2007 to 2009 during the Great Recession Walmart’s share price increased 5.6% while the S&P 500 lost 36.3% in market values. In the brief 2020 recession related to the COVID-19 shutdown, Walmart shares lost 0.3% of their value compared to 23.4% losses by the S&P 500 index, according to Stephens Inc.

While Walmart has raised prices on some food items because of grain price inflation resulting in part from the Russian invasion of Ukraine, the retail giant has vowed to use its scale and expansive supplier relationships to keep prices lower as long as possible.

Analysts also expect Walmart and Sam’s Club to see less foot traffic declines in stores compared to traditional grocery competitors. Basket sizes are also expected to be smaller as consumers are cutting out more non-discretionary purchases, economists said. Given Walmart’s financial strength and scale, the retailer is predicted to weather the holiday well but there will continue to be challenges, according to Bain & Co.

“US retailers are navigating a holiday season rife with uncertainty. Headlines are full of mixed macroeconomic indicators, from waning consumer confidence and rising interest rates to low unemployment and increasing wages,” Bain reported.

Bain said retailers from Walmart to Target don’t have the inventory constraints of last year, but they are sitting on heavy amounts of inventory which bolds for a highly promotional holiday season — again weighing down margins. In some gift categories, merchandise could be marked down by more than 20% on retailers’ websites, according to Adobe Analytics, which tracks online sales. Computers, electronics and toys are all expected to hit the deepest discounting levels since Adobe started tracking figures in 2017.

Walmart shares (NYSE: WMT) closed Friday at $142.58, up 25 cents. The shares have traded between $166.77 and $117.27 over the past 52-week period. Walmart’s share value is down 2.34% year to date.