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Can Walmart Beat Wall Street Expectations in 3Q16?

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Investors are focusing on Walmart after Macy’s missed sales expectations

Retail (XRT) (RTH) giant Walmart (WMT) is scheduled to release its earnings report for 3Q16 on November 17, 2015. The results will be for the quarter ended October 31, 2015, for the fiscal year ending January 31, 2016.

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Earnings expectations

Consensus Wall Street analyst estimates project Walmart’s adjusted EPS (earnings per share) to come in at $0.98 in 3Q16, a decline of 14.9% year-over-year.

  • Target (TGT) will declare its 3Q16 earnings a day after Walmart. It’s projected to increase adjusted EPS by 59.3%, to $0.86 in the quarter.
  • Costco (COST), which declared its fourth quarter and full-year fiscal 2015 results on September 29, 2015, grew adjusted EPS by 9.5% to $1.73 in 4Q15.
  • Kroger (KR) grew adjusted EPS by 25.7% to $0.44 in its last reported fiscal quarter, which ended July 31, 2015.

Walmart, Costco, and Kroger together constitute 11.5% of the portfolio holdings of the Consumer Staples Select Sector SPDR ETF (XLP).

Earnings trends in retail

On November 11, 2015, Macy’s (M), the largest department store chain in the United States, reported a 5.2% decline in sales, missing expectations primarily on unsold inventory. Macy’s also issued a profit warning for the remainder of the fiscal year, citing a higher discounting environment in the fourth quarter.

Macy’s stock fell by almost 14% on November 11. Retail and consumer stocks, including Walmart, Nordstrom (JWN), and TJX Companies (TJX), also posted declines. However Kohl’s (KSS), which declared earnings on November 12, beat the market consensus on both earnings and revenue.

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EPS headwinds

The projected decline in Walmart’s EPS is largely due to Walmart’s higher expenditure on employees and growth investments. In February 2015, Walmart announced it was raising wages, rekindling the debate for a raise in the minimum wage for retail sector employees. You can read a detailed analysis of the impact in our earlier articles, How Walmart’s Pay Hikes Affect the Retail Sector and How Walmart Benefits from Hiking Worker Pay in a Tight Job Market.

The higher US dollar has also negatively impacted Walmart’s earnings compared to Target, Costco, and Kroger. Target and Kroger derive all their sales from the United States. While Costco does have international operations, the company’s exposure to those markets is much more limited compared to Walmart’s.

We’ll analyze Walmart’s earnings potential in greater detail in Part 5 of this series. In the next article, we’ll look at Walmart’s revenue expectations and their drivers.

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