Walmart (WMT) Up 4.2% Since Last Earnings Report: Can It Continue?

Zacks Equity Research

It has been about a month since the last earnings report for Walmart (WMT). Shares have added about 4.2% in that time frame, underperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Walmart due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Walmart’s Q2 Earnings Beat Estimates, Outlook Raised

Walmart posted second-quarter fiscal 2020 results. Adjusted earnings came in at $1.27 per share, topping the Zacks Consensus Estimate of $1.22. However, earnings dropped 1.6% year over year. This could be due to lower operating income, which continued to be hurt by Flipkart’s inclusion.

Total revenues jumped 1.8% to $130.4 billion. The Zacks Consensus Estimate was pegged at $130.5 billion. The year-over-year upside was largely driven by strength in the U.S. business. On a currency-neutral basis, total revenues grew 2.9% to $131.7 billion.

Consolidated gross profit margin contracted 46 basis points (bps) on account of the impact from Flipkart’s addition and continued price investments in various markets. Gross margin in Walmart U.S. contracted 22 bps due to constant price investments, higher markdowns and rising e-commerce mix.

Consolidated operating income fell 2.9% to $5.6 billion. On a constant-currency (cc) basis, operating income declined nearly 2.4%. Results were hurt by Flipkart’s inclusion.

Segment Details

Walmart U.S.: The segment’s net sales grew 2.9% to $85.2 billion in the quarter. U.S. comps, excluding fuel, improved 2.8% backed by a 0.6% rise in transactions and 2.2% in ticket.

Further, e-commerce sales drove comps by 140 bps. E-commerce sales soared 37% on the back of strength in online grocery. Notably, Walmart U.S. exceeded 1,100 delivery locations during the quarter, and now has more than 2,700 pickup locations. Also, Walmart’s NextDay delivery service from its website covers roughly 75% of the U.S. population now. Operating income at the Walmart U.S. segment increased nearly 4% to $4.7 billion.

Walmart International: Segment net sales slipped 1.1% to $29.1 billion. On a currency-neutral basis, net sales inched up 3.3% to $30.4 billion, with nine out of 10 markets registering positive comps. Operating income at this segment fell 29.6% to $0.9 billion. On a currency-neutral basis, operating income slumped 27.3% to $0.9 billion.

Sam’s Club: The segment, which comprises membership warehouse clubs, saw its net sales rise 1.8% to $15 billion. Sam’s Club comps, excluding fuel, rose 1.2%. While transactions increased 5%, ticket was down 3.8%. E-commerce fueled comps by nearly 180 bps. Segment operating income came in at $0.5 billion, up 19.4% year over year.

Other Financial Updates

In the first six months of fiscal 2020, Walmart generated operating cash flow of $11.2 billion and incurred capital expenditures of $4.9 billion, resulting in free cash flow of $6.3 billion. Walmart allocated $1.5 billion toward dividends and made share buybacks worth $1.6 billion during the fiscal second quarter.

Recent Developments & View

Walmart continues to focus on boosting innovation and leveraging technology to drive growth. Management remains pleased with its quarterly performance, and revised its outlook for fiscal 2020. 

The company now anticipates fiscal 2020 consolidated net sales growth of nearly 3% compared with the previous outlook of at least 3%. Management’s earlier guidance included benefits from Flipkart, adverse impacts from Walmart Brazil’s deconsolidation and planned tobacco sales cut downs at Sam’s Club.

Further, management continues to project Walmart U.S. e-commerce net sales growth of 35% year over year. However, Walmart International net sales are now expected to rise 3-4% at cc against the earlier view of increase 5% at cc.

U.S. comps are now expected to advance at the higher end of the previously guided range of 2.5-3% (excluding fuel). Comps at Sam’s Club are likely to grow roughly 1%, excluding fuel, and nearly 3%, excluding tobacco fuel.

The company now expects consolidated operating income growth in a range of slight decline to slight rise (including Flipkart) and increase at a low to mid single-digit rate (excluding Flipkart). Earlier, management forecasted consolidated operating income to fall low-single digits (including Flipkart) and rise low-single digits (excluding Flipkart).

Finally, bottom-line growth is now envisioned between little decrease to slight rise (including Flipkart) and increase at a mid to high single-digit rate (excluding Flipkart). Earlier, the company projected earnings per share to decline at a low-single-digit rate year over year (including Flipkart), whereas the same was expected to increase in a low to mid single-digit rate (excluding Flipkart).

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended upward during the past month.

VGM Scores

Currently, Walmart has a strong Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. Following the exact same course, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Walmart has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.



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