Walmart ‘flexed its muscle’ going into holidays, Jefferies managing director says

Jefferies Managing Director Stephanie Wissink joins Yahoo Finance Live to assess Walmart's outstanding earnings beat this quarter, as other retailers are reporting similar record highs heading into the holiday season.

Video Transcript

JULIE HYMAN: Retail remains the big story this morning. That retail sales number coming out ahead of estimates. Headline number up 1.7%.

And then, of course, we have the various companies that are reporting their numbers. Walmart reported. Home Depot reported and is now at a record high. Lowe's is apparently at a record high as well.

And to talk about all of these numbers and to kind of illustrate and break down what they mean for the markets, we've got Stephanie Wissink with us. She is Jefferies managing director. Steph, good to see you here.

I want to start with Walmart here this morning. And we were talking during the break, and what you said sort of clarified something in my mind that I read that Doug McMillon said this morning in that statement. He was talking about the holiday season, and he said looking ahead, we have the people, the products, and the prices to deliver a great holiday season for our customers and members. That, to me, seems to be sending a message that if you want to go buy a toy at Walmart that it'll be there, which is not necessarily the message we're getting from everybody.

STEPHANIE WISSINK: No, I completely concur. I think Walmart flexed its muscle on the quarter and into holiday, and they talked a lot about, throughout the conference call, their ability to access the supply when they needed it, to get that supply into the US market in a timely fashion, and to hire the people to serve the customer this holiday season with over 200,000 seasonal employees brought on. And they clarified that 75% of those are going to be in store. So I think you're going to see the service level, both to the customer and, of course, to the vendor and the partners, is going to be at an elevated level for Walmart and really just surprised us across the board.

I would say the other big standout for us on the quarter is that consumers like to shop in stores. About 60% to 65% of the comp was driven by in-store traffic, which is quite remarkable if you think about just what we've seen over the course of the last 18 months, that the American culture hasn't given up yet on retail stores.

BRIAN SOZZI: I find this quarter really surprising by Walmart, Stephanie. Inflation is all over the place. It pressured this company's profit margins. Prices are going up on consumers. How long can Walmart just continue to put up quarters like this in this inflationary environment against a backdrop where their low-income consumers are really-- I mean, they're getting walloped.

STEPHANIE WISSINK: Yeah, I mean, this came up a lot in the Q&A. We haven't seen an era like this of inflation really for any of our professional histories, and certainly it's just unprecedented on the backside of a really unusual demand cycle.

I think for Walmart, their expectations are that they can continue to comp. Their guidance for the fourth quarter is 5%. Certainly that includes some inflationary price, you know, probably a little bit less on the unit side, more so on price.

But I think they're seeing some indications-- and they talked about this-- that the consumer is healthy. They're responding to some of the early price action. They're not seeing deterrence. And clearly their income profile of their consumer is seeing one of the highest increases in wage rates. When you look at that wage income distribution, the low end is where we've seen the greatest amount of wage increases. So I think they're probably seeing some of that.

Clearly there's some stimulus that's still long-tail stimulus probably benefiting them. They did call that out in the third quarter, but it's becoming less and less. So I think some of this is really an indication of how that low end feels in terms of their willingness to go out and spend into some of that inflationary income that they're seeing.

JULIE HYMAN: So all of that said, why is the stock down? Why isn't it doing better? It's not as though it's been running up into this report. It hasn't. It's actually been declining a little bit in the last few days, and it hasn't performed as well as some of its peers in the retail space. I mean, it's not down a lot, but nonetheless, we're all talking about this being a pretty strong report, and the shares are off a percent.

STEPHANIE WISSINK: Yeah, I think, you know, maybe in part the expectation for the fourth quarter was a little bit higher. Consensus had already been at 5%. I think the buy side might have been a little bit ahead of that, so that guidance seemed to be very straight down the fairway.

Part of it could be some degree of conservatism. They just guided to about 7% on the top end and delivered a 9%, so I do think their ability to really stretch and achieve over the top end of that guidance range exists.

But I think the other thing too is that what you're seeing if you step back and look at this quarter as a proxy is a very real tension between driving for sales and protecting margins. And this is probably one of the most challenging environments for an executive team to have to finesse that balance, being very conscious of the supply chain and rising costs of inputs as well as labor, servicing the customer, and at the same time, trying to win the favor of consumers and drive market share, both for Walmart on the general merchandise side but then on the grocery side as well because grocery is a very important attribute of their overall merchandise portfolio.

BRIAN SOZZI: Steph, one thing that caught my eye is they buried on page, I don't know, 72 of the earnings release, whatever it was-- they noted that they added 21 million new Marketplace members for Walmart US. Do you think Amazon should be taking Walmart and what they're doing online a lot more seriously?

STEPHANIE WISSINK: Yeah, I think the stat was 21 million new listings, and the total listing level is about 61 million, so a meaningful increase in that Marketplace.

So a couple of things that struck us about the conference call. The first is that the CEO of Walmart, who sits on top of a large enterprise with global scale, was rattling off about a dozen strategic initiatives, including Marketplace, that they have kind of working as strategic ways to enhance value for shareholders and drive return on investment. That, to me, tells you that you have an executive team that is intimately aware of the core business but also the opportunity set.

And then the second thing is just looking at that number, 21 million of a net add to get to 61 million. That's a big increase, and I think that's also to us reinforcing that Walmart is viewed by merchants and vendors and Marketplace sellers as a new destination to build value. And so the customer reach that Walmart has is very much competitive, and the Marketplace sellers are finding that that opportunity exists for them to reach those consumers through the Walmart engine.

So I think that really impressed us and surprised us just in terms of the magnitude. But I think when you start looking at this secondary ecosystem of value creation, they're really starting to put some points up on the board.

BRIAN SOZZI: No, for sure. What are your top picks before we let you go? So , Target I read your premarket note there as well. You have Costco just hit a new 52-week high yesterday. I did like the quarter out of Sam's Club. It really shocked the heck out of me in many respects. What stocks do you like and why?

STEPHANIE WISSINK: Yeah, the three we've been focused on have been Walmart-- just again, we're very much believers in this big ecosystem change and the quest for digital. Costco clearly the club leader, but I completely concur with you these Sam's Club numbers just reinforce that the club channel was a winner during COVID and will stay a winner, retaining customers, hitting all-time highs in terms of membership counts and engagement and basket.

And then we like Macy's on the department-store side. I think it's, you know, one of a collection of department stores that's a survivor but probably the easiest pitch case in department stores right now just given that they are a market leader. They're making some significant change. They've got a cost-restructuring program. And then whether you'd like to buy into some of the incremental value add of real estate or dot com, that's driving some of the stock-price performance.

But we think from a department-store perspective, again, just reinforced by Walmart, American shoppers like to shop in stores, and increasingly we're seeing that traffic is moving back into store environments. So the job of the retailer is just to wow that consumer, impress them with that in-store experience, and remind them why that in-store [INAUDIBLE] is still important.

JULIE HYMAN: One that was not on that list I think was Target, which is out with its earnings tomorrow. The stock I believe closed yesterday at a record. I don't know what it's doing this morning. Haven't had a chance check yet. But what do you-- can we-- oh, it's up again, so there you go at another record. What can we extrapolate from Walmart to Target?

STEPHANIE WISSINK: Yeah, you know, I think it's common to put these two companies almost as a pair, and I would say that the two companies are actually becoming less alike and more different. Target, actually as a hometown fan, I would say that their business is likely to continue to be very, very strong. We raised our comp estimate going into the quarter. We do think that they're going to outperform.

They're the one, though, as we look out into '22 and '23 that we just have less clarity around their ability to kind of extend the momentum, and I think expectations have gotten to be quite high. That being said, again, I think their execution has been near flawless. They are setting the standard in omnichannel, not only from an execution perspective but from a consumer-engagement perspective.

I can tell you at my local Target, which is one of the top volume in their chain, there's still a line every weekend at curbside pickup. People love the services that they're adding. And I think, frankly, they have been a net winner over time, and certainly recently, from a merchandising and a product-assortment perspective.

So really keeping an eye on some of those strong categories that have benefited them, especially home. That's a big power category for them. We know home was very strong over the course of the last 18 months. Still strong in some of the areas of home improvement but not quite clear on just how that's going to play out over the next couple of years.

JULIE HYMAN: Yeah, and definitely curbside pick up for Walmart, Target, that's really been a game changer and something obviously that's been accelerated by the pandemic.

Stephanie, good to see you. Thanks so much for being with us this morning. Stephanie Wissink of Jefferies.