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Walmart’s Outlook – Affected By Headwinds And Tailwinds

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Macroeconomic factors affecting Walmart

Walmart (WMT) will report full-year earnings on February 19, 2015. Markets are expecting the retailer to report earnings per share, or EPS, of $1.54 in the fourth quarter. This an increase of 0.8% year-over-year, or YoY.

More importantly, Wall Street will be watching for the retailer’s same-store sales trends, both in the US and in its major markets.

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Less cyclical

Walmart specializes in providing low-cost options for products. Besides, food and grocery items account for over 56% of the retailer’s US revenue. Since these are consumer staples (XLP), it gives the retailer relative immunity from macroeconomic headwinds—especially in the larger US market. Although the Great Recession affected the retailer’s revenue, the impact was less severe—compared to more cyclical consumer industries.

Households, incomes, and minimum wages

Walmart’s outlook also tends to benefit when the economy improves. When employment and disposable income rise, people tend to spend more, not only on groceries and staples (XLP), but also on other consumer discretionary (XLY) items stocked by the retailer (XRT) (RTH). Lower-income households are a key demographic for the company’s sales. They tend to spend a relatively larger proportion of their income on food and staples.

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In the US, the ranks of the employed have been surging in recent months. This will likely be beneficial for companies like Walmart and Kroger (KR). It will also be positive for discount retailers—like Dollar General (DG), Family Dollar Stores (FDO), and Dollar Tree (DLTR). In the short term, the lower energy price trend will also benefit the retailer and other firms in the consumer discretionary sector.

Revenue headwinds

Walmart reports earnings in US dollars (UUP). The US dollar is almost at six-year highs. Walmart also derived ~29% of its revenue from markets overseas. The appreciation of the US dollar will likely impact its earnings in a big way. The US dollar appreciated significantly compared other key currencies—notably the Canadian dollar, Japanese yen, and the euro. This would shrink the revenue overseas.

Besides, these countries are facing economic problems of their own. Their economies are displaying slow or negative growth. This casts a dampener on Walmart’s outlook. It will also impact other consumer firms.

In the United Kingdom, one of the five largest international markets for Walmart is retail sales. Retail sales showed deflationary trends because of a highly competitive discounting environment. This is leading to sales declines for Walmart. Industry dynamics are also changing.

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