Market watchers expect 12% gain in first quarter net income for Walmart

Walmart Inc. is expected to see net income and revenue rise 12% and 2.5%, respectively, when the retail giant reports first quarter earnings ahead of the market opening on Thursday (May 17).

Walmart benefited from a stronger economy, healthier consumer confidence and lower tax rates but transportation costs and stalling price inflation could curb income more than expected, according to analysts who cover the company.

Some analysts reduced their estimates lower than the consensus per share net income of $1.12 for the period ending April 30. A year ago Walmart reported net income of $1 per share as its operating margins ticked down to 4.65% from the 12-quarter average of 4.77%.

The low guidance on the street is $1.06 per share, with the bullish forecast at $1.18 per share. Stephens Inc. Analyst Ben Bienvenue expects $1.10 per share which equates to operating income of $5.043 billion, down from $5.237 billion in the year-ago period. Total net income before any added one-time expenses is expected to be $3.386 billion in the quarter, compared to $3.039 billion a year ago.

Bienvenue applauded Walmart’s $16.6 billion majority stake investment in Flipkart, saying it should position the retailer to be a leader in a new attractive market like India. He said the international strategy is a long-term play and the Flipkart deal puts Walmart in a position to win in India over the next five years. International is only about 25% of Walmart’s total revenue with the lion’s share coming from the U.S.

He said U.S. stores are more profitable and pickup grocery is helping to drive traffic and ticket metrics higher at Walmart, while some of their brick and mortar competitors are struggling. Bienvenue said Walmart also continues to lower prices against rivals like Kroger in the Little Rock market. He said Walmart’s price gap lead over Kroger has narrowed in the past quarter or two but the basket comparison year-over-year of 30 items found Walmart prices rose 0.9% while Kroger’s basket prices rose 2.6%.

Reduced prices – referred to as “price investments” in the retail industry – initially hurt margins but if sales increase because of lower prices then the productivity loop rewards the retailer with higher overall revenue. U.S. ecommerce sales are expected to be lower than a year ago, but as Walmart continues to expand online grocery pickup to 1,000 more stores this year sales are expected to improve in the back half of the year for a fiscal year improvement of 40%, according to Bienvenue.

Bienvenue expects same-store sales to rise 2.3% year-over-year at Walmart U.S., while Sam’s Club comp-sales are expected to be 0.5% thanks to lower tobacco sales by the clubs. The consensus for Walmart U.S. comp-sales is 2.5% compared to 1.4% a year ago. Wall Street expects Sam’s Club comp-sales to be nearly flat at 0.1%, compared to 1.6% a year ago. Bienvenue remains bullish overall for Walmart giving the company an “overweight” rating with a one-year price target of $108, despite the lower earnings impact from the Flipkart purchase expected to show up near the end of the year.

BEARISH VIEW
While Walmart is doing plenty of things right, the company’s growth guidance is in the low-single-digit range for the foreseeable future and margins are expected to remain under pressure, according to Brian Gilmartin, portfolio manager at Trinity Asset Management. He said his somewhat bearish view relates to the uphill battle he sees Walmart fighting for several more years as it invests more heavily in e-commerce sales — still just 4% to 5% of the company’s overall sales – projected at $512 billion this year – according to Morningstar.

Gilmartin is not as bullish on Walmart saying earnings are flattening and capital expenditures are rising and need to go higher in the race against Amazon.

“Walmart gave Amazon a 20-year head start and Amazon now does five times the e-commerce revenue that Walmart generates in a year. That is a tough hill to climb,” he noted.

Many analysts are giving Walmart the benefit of the doubt in that the retailer corrected the operations glitch that negatively weighed on e-commerce sales in the busiest quarter of the year. They remain positive on Walmart shares given the traffic and ticket growth the company continues to report in its massive U.S. segment as more of its competitors like Toys R Us and southeastern region grocery Winn Dixie shutter stores.

FLIPKART WILDCARD
Investors have been somewhat bearish on Walmart shares since the Flipkart deal was announced last week as management said earnings will fall by 85 to 90 cents per share through next year, beginning in the back half of this year. The $16 billion price tag makes Flipkart the largest acquisition the company has made. Flipkart is not yet profitable, nor is Walmart’s own e-commerce business. Walmart’s e-commerce sales slowed in the fourth quarter while Amazon reported its largest growth period on record.

Walter Loeb, a retail analyst at Loeb Associates, said Walmart’s global achievements are checkered from Germany and South Korea to being overshadowed in China and Brazil. He said the recent sale of a majority stake in Asda point to the retailer’s inability to compete in foreign markets.

“With this disappointing track record globally, it is difficult for me to justify management’s rationale to enter India when growth of the domestic business hovers below 2%. … I hope this investment in Flipkart is not another misstep by Walmart that becomes a distraction in the future. I worry,” Loeb noted.

Keith Anderson, senior vice president of strategy at Profitero, told Talk Business & Politics India is about potential growth. He sees is as a strategic move for Walmart that also puts pressure on Amazon in that market. Anderson said the deal may give Walmart new global sourcing and supply chain advantages.

“This is a very big acquisition for Walmart and the choppy trajectory of the Jet post-acquisition is a probably giving some observers some pause,” Anderson said.

Walmart shares (NYSE: WMT) closed Monday at $84.39 up $1.01 on the day. The share price is down 14.5% from Jan. 2, after peaking at $109.55 on Jan. 29 ahead of the company’s fourth quarter earnings report. Over the past 52 weeks shares have traded between $73.13 and $109.98. The one-year consensus target price by analysts on the Thomson Reuters survey is $105.28.