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Will E-Commerce Decide Walmart’s (WMT) Fate in Q3 Earnings?


Supermarket giant Wal-Mart Stores, Inc. WMT has been making aggressive efforts to expand in the e-commerce space, which is dominated by Amazon.com Inc. AMZN. Efforts to enhance physical and digital operations has been fueling Walmart’s top line and U.S. comparable store sales (comps) for quite some time now, helping it surge about 30% over a year, faring better than the industry’s 19.6% jump.

Also, the company’s bottom line has surpassed the Zacks Consensus Estimate for eight straight quarters now. So, let’s see how things are placed for the company, which is slated to release third-quarter fiscal 2018 results on Nov 16.

Wal-Mart Stores, Inc. Price and EPS Surprise

Wal-Mart Stores, Inc. Price and EPS Surprise | Wal-Mart Stores, Inc. Quote

Factors Setting the Stage for Q3

While Walmart’s constant efforts to expand in the e-commerce space is likely to fuel its top line, investments associated with these expansions may weigh upon its margins. Notably, the Zacks Consensus Estimate for the quarter under review has remained stable over the past 30 days at 97 cents. The estimate is pegged a penny lower than the year-ago period earnings figure. Nonetheless, analysts polled by Zacks expect revenues of $121.1 billion, up over 2% from revenues reported in the year-ago quarter.

Robust E-Commerce Initiatives – A Major Growth Driver

As Amazon’s growing dominance has created intense competition for retailers, Walmart has been undertaking significant efforts to boost its e-commerce sales. This was evident in the company’s last reported quarter, wherein both top and bottom lines improved year over year and topped the Zacks Consensus Estimate. Results were largely driven by strength in the company’s e-commerce business, as evident from a 67% surge in its U.S. e-commerce GMV, with sales up 60% (including acquisitions).

Well, Walmart is likely to continue gaining from its efforts to expand its e-commerce presence across all three divisions. In this regard, the buyouts of Moosejaw, Shoebuy and Bonobos have solidified its product assortment, and are likely to continue fueling sales. Also, the company is set to benefit from its rollout of online grocery, which delivered robust results in the second quarter.

Sam’s Club & International Businesses Bode Well

Walmart’s Sam’s Club division has also been performing well, as witnessed in the last quarter. Incidentally, Sam’s Club comps (excluding the impact of fuel sales) rose 1.2% compared with 0.6% growth in the prior-year quarter. This was mainly attributable to a 2.1% rise in traffic and 0.8% contribution from e-commerce sales. As for the International segment, results were somewhat impacted by the divestitures of Yihaodian and Suburbia. Nonetheless, Walmart’s initiatives to serve customers better (in-store and e-commerce) helped its International sales climb 2.5% on a currency neutral basis. Notably, nine out of 11 regions posted positive comps, with Walmex continuing to outperform as comps here advanced 7%.

We believe that all aforementioned factors, along with strong back-to-school season offerings are likely to drive Walmart in the quarter to be reported. In the third quarter, management expects U.S. comp sales growth in the range of 1.5-2.0%. Sam’s Club comp sales, without the impact of fuel sales, are expected to increase 1-1.5%.

Heavy Investments May Pressurize Margins

While the aforementioned factors bode well for the company, costs associated with investments in e-commerce expansion and technological advancements; the mix impact from growing e-commerce operations and Walmart’s compelling pricing strategy remains a threat to margins. This, in turn may dent Walmart’s bottom line in the quarter to be reported. Adjusted earnings for the third quarter is envisioned in a range of 90-98 cents per share.

Segment Estimates for Q3

The consensus mark for Walmart U.S. net sales is currently pegged at $76.7 billion, representing a 2.8% upside from the year-ago reported figure. The consensus estimates for Walmart International and Sam’s Club sales are pegged at $28.8 billion and $14.6 billion, depicting increases of 1.8% and 2.8%, respectively.

A Look at the Zacks Model

Our proven model does not conclusively show that Walmart is likely to beat bottom-line estimates this quarter. This is because a stock needs to have both a positive Earnings ESPand a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Though Walmart currently carries a Zacks Rank #3, its Earnings ESP of -0.12% makes surprise prediction difficult.

Stocks With Favorable Combination

Here are some companies you may want to consider as our model shows that these have the right combination of elements to post an earnings beat:

Zumiez Inc ZUMZ has an Earnings ESP of +0.69% and flaunts a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Ross Stores Inc ROST has an Earnings ESP of +0.27% and carries a Zacks Rank #2.

Home Depot Inc HD has an Earnings ESP of +0.40% and carries a Zacks Rank #2.

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