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Why Walmart Could Continue to Beat EPS Estimates

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Recent past

Walmart’s (WMT) adjusted EPS is under stress, reflecting continued pressure on margins and dilution from the acquisition of Flipkart. In the previous quarter, Walmart’s adjusted EPS fell about 1% on a YoY basis. Despite the pressure on EPS, Walmart has managed to surpass Wall Street’s estimates in the last five consecutive quarters, which is impressive.

Continued improvement in its US comparable sales, a lower adjusted effective tax rate, and a decline in the outstanding share count supported its better-than-expected bottom line. However, weak margins in the international markets and investment in pricing continued to hurt.

In comparison, both Costco (COST) and Target (TGT) have also impressed investors with their stellar EPS growth rate. Costco’s adjusted earnings have grown at a double-digit rate in the past nine quarters. Meanwhile, Target’s bottom line has marked double-digit growth in the last five quarters.

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Outlook

We expect Walmart’s bottom line to decline in the near term, reflecting investment in pricing and weak margins in the international segment. Analysts’ expect Walmart’s bottom line to fall in the second quarter of the current fiscal year. Meanwhile, its EPS are expected to return to the growth trajectory in the second half of fiscal 2020. However, the weakness in the first half is likely to drag full-year EPS down.

Despite low EPS, Walmart could continue to beat Wall Street’s adjusted EPS estimate on the back of higher comparable sales, a lower tax rate, and a favorable product mix. Meanwhile, pressure on margins from higher transportation costs is likely to moderate, which in turn, is expected to support earnings.

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