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Why Walmart Stock Could See More Upside

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  • Walmart stock rose more than 6% due to its better-than-expected second-quarter performance.
  • The stock could see more upside due to the improved earnings outlook and sustained momentum in comps.

Walmart (WMT) stock closed 6.1% higher on Thursday due to the company’s better-than-expected second-quarter earnings. Management raised the fiscal earnings outlook. US comparable sales or comps will likely sustain the momentum, which could drive Walmart stock higher.

Walmart’s second-quarter earnings beat the consensus estimate by a wide margin. Walmart posted an adjusted EPS of $1.27. Meanwhile, analysts expected the retailer to post an adjusted EPS of $1.22. Including the second-quarter earnings beat, Walmart beat the consensus estimates for six consecutive quarters.

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We think that the ongoing US-China trade war is a concern for retailers. The trade war will likely impact consumer spending. However, the trade war will have less of an impact on large retailers like Walmart. Notably, Walmart has a diversified supplier base. The company benefits from economies of scale. The company’s multi-category portfolio reduces tariff risks.

What could drive Walmart stock?

We expect Walmart stock to continue to benefit from the sustained momentum in the comps, especially in the US. Walmart’s online grocery pickup services expanded to 2,700 stores, which drove its comps higher. The company is on track to add another 400 locations by the end of the year. Now, the company offers same-day grocery delivery through 1,100 stores. Walmart plans to add another 500 stores.

We think that Walmart’s expanded online grocery pickup and delivery services provide it an edge over its peers. Notably, Walmart drives more customers than its peers in the online grocery business. According to a study by Second Measure, Walmart had 62% more customers in June than Instacart—its next-highest competitor. Amazon was third on that list with its Amazon Prime Now services.

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Walmart’s digital business is booming and firing on all cylinders. During the last reported quarter, the company’s US e-commerce sales rose 37% YoY (year-over-year). On average, Walmart’s digital sales rise 40% in the last five quarters. Fast delivery, expanded offerings, and value pricing drive Walmart’s digital sales and comps.

The profitability outlook is improving. Higher comps and growth in sales of higher-margin private brands support the margins. Management raised the fiscal earnings outlook. Walmart’s bottom line will likely fall or increase slightly. Earlier, the retailer forecasted a low-single-digit decline in its EPS.

Analysts are upbeat on Walmart 

Analysts maintain a favorable outlook on Walmart stock. Among the 33 analysts covering the stock, 20 recommended a “buy,” 12 recommended a “hold,” and one recommended a “sell.” Walmart’s digital transformation helped it beat rivals in the grocery business.

We expect Walmart to dominate the online grocery business, which will support its comps. Productivity savings, moderating cost, and increased sales of private brands will likely drive the company’s bottom line.

So far, Walmart stock has risen 21% this year.

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