Walmart earnings: E-commerce investments could offset earnings growth

Walmart Inc. is scheduled to announce fiscal second-quarter 2019 earnings before the bell on Thursday, and Credit Suisse analysts are concerned about earnings growth despite gains in various parts of the business.

Analysts led by Seth Sigman say they’ve seen positive trends through the quarter, including share gains in grocery, growth from private labels, which benefits the food business, and expectations that online grocery will ramp up.

However, analysts maintain their neutral stock rating and $85 price target.

“We struggle with the path to higher earnings per share as cost pressures and e-commerce investments continue, implying upside needs to come from valuation,” analysts wrote in a note published last week. “While e-commerce investments were initially expected to peak in FY18, management suggested that losses could worsen again in FY19 due to additional investments as well as freight.”

J.P. Morgan analysts also warn about investments.

“Clearly Walmart’s several years of e-commerce initiatives are paying off, but likely at the expense of medium-term profits,” analysts said. “Walmart’s large market share (20%+) and mix (55%) in the lower-growth grocery category make the transition more difficult from a financial perspective.”

J.P. Morgan analysts also maintained their neutral stock rating and $87 price target.

The average rating of 30 analysts polled by FactSet on Walmart WMT, -0.40%stock is the equivalent of overweight , and the average price target is $94.23.

Here’s what to expect:

Earnings: FactSet and Estimize, which crowdsources estimates from sell-side and buy-side analysts, hedge-fund managers, executives, academics and others, are guiding for earnings of $1.22 per share, up from $1.08 last year.

Walmart has beat earnings expectations 10 of the last 11 quarters.

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Revenue: FactSet’s analyst consensus for revenue is $126.02 billion, up from $123.36 billion last year. Estimize is expecting revenue of $126.14 billion.

Walmart has exceeded revenue expectations for the last four quarters.

Stock price: Walmart shares are down 9.1% for the year to date, but up 7.6% for the past three months.

Meanwhile, the Dow Jones Industrial Average DJIA, -0.23%is up 1.6% for the last three months and the S&P 500 index SPX, -0.13%has gained 3.6% for the period.

Other issues:

“We don’t believe there was much change in trend from 1Q18 and continue to expect a 2.0% increase in same-store sales at Walmart U.S. and a 3.0% increase at Sam’s, assuming some negative impact from the removal of tobacco from certain clubs (an estimated 400 [basis points] to FY18 overall),” wrote MKM Partners analyst Patrick McKeever.

FactSet’s same-store sales consensus is for 2.3% growth.

MKM rates Walmart shares neutral with a fair value estimate of $92.

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Quo Vadis Capital expects “strong” growth in e-commerce and traffic in the second quarter, which it says “are the most important metrics for shares in the near-term.”

In the long term, the retail giant’s focus on digital is the right strategy, not just for growth but for generating the best return on investment.

“Walmart should create a positive backdrop for retailers that have a national footprint, own their real estate, offer value to the consumer, are in a strong financial position, and are executing on a plan to digitally engage all aspects of their consumer promise with the customer both inside and outside the store,” Quo Vadis wrote.

“The best examples of this within retail, in our opinion, are furnished by Walmart’s initiative to build out drive-through pick up lanes for online grocery orders and Target’s acquisition of Shipt, which is enabling online orders to be paired with same-day home delivery.”

Quo Vadis has a buy rating on both Walmart and Target Corp. TGT, -0.52%shares.

KeyBanc Capital Markets data indicates that Walmart will be able to achieve the 40% e-commerce growth goal it set out for 2018.

Walmart reported e-commerce growth of 24% in February, down from more than 50% the previous three quarters.

“We believe that Q2’s results should affirm that the guidance remains achievable,” wrote analysts led by Edward Yruma.

Analysts say there was “sequential acceleration” in spending this quarter.

KeyBanc rates Walmart shares overweight with a $105 price target.

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