Walmart: 2 Metrics, Costs And Online Sales, Still In-Focus During Q4 Report

Walmart: 2 Metrics, Costs And Online Sales, Still In-Focus During Q4 Report  | Feb 12, 2019 06:15

  • Reports Q4 2019 results on Tuesday, Feb. 19, before the market opens
  • Revenue expectation: $138.66 billion
  • EPS expectation: $1.33

When the world's largest brick-and-morter retailer reports fourth-quarter earnings next week, it will need to provide investors with a compelling reason to get bullish about its shares. One of the biggest worries Walmart (NYSE:WMT) investors continue to focus on is how the retailer will keep improving its margins when costs are escalating.

WMT Weekly

During Q3, comparable sales for Walmart stores in the U.S—a key performance barometer—rose 3.4%, beating analysts’ estimates. That beat, however, failed to produce a rally in its stock since costs also escalated. Along with controlling costs, Walmart also needs to show that its e-commerce strategy is well on track to counter online competitors, including Amazon (NASDAQ:AMZN) as well as digital upstarts that are attracting millennial shoppers in droves.

Given these challenges, in our view, Walmart’s quarterly report card has been impressive. A turnaround in same-store sales, which started in the third-quarter of fiscal 2015, has gained pace in the company’s fiscal 2019. As of its most recent report on Nov. 15, 2018, comparable store sales rose for 16 consecutive quarters. If that U.S. growth momentum continues, we see good reasons to believe that Walmart is in a solid position to continue to repeat that performance.

This growth cycle has been fueled by a number of pivotal efforts: the company’s massive investments in its online channels, its focus on cleaner and better-stocked stores and improvement in its grocery offerings. Walmart’s e-commerce business has expanded by around 40% in the past two earnings reports, an impressive reading on a metric that's critical for the company’s long-term success.

We see this retail giant continuing to gain market share in these categories going forward, while keeping a tight lid on costs. No other retailer commands the bargaining power that Walmart enjoys, enabling it to squeeze suppliers for lower prices.

Short-Term Headwinds

That said, we're also cognizant of some short-term headwinds that could keep its share price under pressure. India’s recent regulatory moves to support small merchants against e-commerce giants ahead of the general election in the spring has created some uncertainty for Walmart’s global expansion.

The new rules may hurt both Walmart-owned Flipkart and Amazon’s local business as the Indian market becomes more complicated for these giant retailers. Other factors that could pressure Walmart’s stock include the ongoing U.S.-China trade battles and any uncertainty over the general direction of the markets and the economy.

Still, despite these challenges, we like Walmart stock for long-term investors and see the retailer as a good candidate for any defensive portfolio, especially when its earnings momentum remains strong and its online presence continues expanding.

Bottom Line

Some investors might consider Walmart stock, which closed yesterday at $96.20, as expensive given its forward price-to-earnings multiple of around 20. But that concern ignores the fact the retailer isn’t the same company it was five years ago.

With current e-commerce momentum and its strong, core brick-and-mortar operations, we believe if there's any post earnings sell-off, it's a good entry point for long-term investors.

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