Walmart Stock Looks Attractive before Q2 Earnings
- Walmart is scheduled to announce its second-quarter earnings on Thursday.
- The comps will likely sustain the momentum and drive Walmart stock higher.
Walmart’s upcoming second-quarter earnings
Walmart (WMT) is scheduled to report its results for the second quarter of fiscal 2020 on Thursday. We expect the company to have impressive comps, especially in the US. The comps could drive Walmart stock higher. The company’s second-quarter earnings might decline, which would reflect growth investments and weak margins in the international business. However, the EPS will likely beat analysts’ estimate due to improved comps and a better mix. Moderation in transportation costs should cushion the bottom line.
Walmart had an impressive comps growth rate in the past several quarters. The sales in the company’s US business and the Walmex region (Mexico and Central America) stood out. We expect the sales in these two regions to be strong and support the overall growth.
The comps in Walmart’s US business have increased for 19 consecutive quarters. The comps had record growth in the first quarter. The Walmex region is growing at a brisk pace.
Despite strong sales, weak margins in the international segment impact Walmart’s earnings. Moreover, investments in growth initiatives, including pricing and order fulfillment, also remained a drag.
Analysts expect Walmart to post revenues of $130.1 billion in the second quarter—up 1.6% YoY (year-over-year). The company will likely post an adjusted EPS of $1.22—down 5.4% YoY.
The expanded digital business drove Walmart’s stellar comps growth. The company’s e-commerce arm continues to contribute to the comps growth rate. Walmart expanded its online grocery pickup and doorstep delivery services, which we expect to increase in the second quarter. The company had more than 2,450 stores offering online grocery pickup services at the end of the first quarter. Meanwhile, Walmart provided grocery delivery services through 1,000 stores.
Besides offering convenience, Walmart added about 2,000 new brands to its website, which drove its digital sales. On average, Walmart’s e-commerce sales have increased 41% in the past four quarters.
Walmart expanded its digital fulfillment options in international markets, which should support its sales. Price investments in some of the markets should drive the comps.
Walmart’s healthy comps growth and favorable mix will likely drive its bottom line. The lower outstanding share count will likely support the company’s second-quarter earnings. However, dilution from the Flipkart acquisition could drag the EPS down.
Why does Walmart stock look attractive?
The recent pullback in Walmart stock makes it an attractive bet. Walmart stock has fallen about 8% in the past month. Growing trade war concerns impact Walmart stock. However, we expect the impact to be relatively low due to the company’s multi-category portfolio. Besides Walmart, we expect Target and Costco also to take less of a hit from increased tariffs. These mass merchandisers have a contingency plan in place including a diversifying sourcing base.
We expect Walmart stock to gain from sustained momentum in its comps. The higher traffic and ticket size led by expanded digital fulfillment options and the addition of new brands will likely support the company’s comps growth. Value pricing and omnichannel offerings will likely continue to support the company’s growth.
Walmart’s earnings could stay low due to the dilution from Flipkart. However, excluding the Flipkart acquisition, Walmart’s bottom line will likely improve YoY.