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Factors Setting the Stage for Walmart’s (WMT) Q4 Earnings


Walmart Inc. WMT, now officially an omni-channel retailer, is set to release fourth-quarter fiscal 2018 results on Feb 20. We expect the supermarket giant to continue gaining from its focus on international expansion, solid domestic business and dynamic measures to counter Amazon’s AMZN growing dominance. These efforts have long been driving this Zacks Rank #2 (Buy) stock, helping it rally about 52% in a year, crushing the industry’s growth of roughly 41%.

E-Commerce Continues to Play a Pivotal Role

Well, Walmart has been taking numerous initiatives to blemish Amazon’s rising prospects. In fact, recently rounds were made that Walmart is planning to build an inhouse cloud computing offering — a card already played by Amazon before. Also, sources revealed that Walmart’s Sam’s Club is providing free shipping services to premium members. These moves clearly echo the company’s transformation ideals from Wal-Mart Stores to Walmart that bears the biggest testimony to its efforts to keep pace with consumers’ changing preferences.

The big box retailer’s various buyouts, alliances, and improved delivery and payment systems also reflect the same. Evidently, Walmart’s buyouts of ShoeBuy, Moosejaw, Bonobos, ModCloth and Jet.com underscore its quest to build an impressive digital brand portfolio. The company’s Walmart Pay mobile payment system, and Mobile Express Returns program further highlight its focus on accelerating online business and making shopping easier and faster.

Online Grocery: A Major Growth Avenue

Apart from this, Walmart is making aggressive efforts to expand in the booming online grocery space, which was a major contributor to its e-commerce sales in the third quarter. In fact, Walmart’s efforts to enhance delivery services resonate quite well with this strategy. Incidentally, the company has been testing same-day deliveries with Deliv for quite some time now, while it also acquired a delivery startup Parcel, Inc., which specializes in same-day delivery for perishable and non-perishable products. Other than this, the company’s Walmart Pickup program enables customers to place orders online and then pick them up at a store for free. In earlier developments, Walmart partnered with ride hailing services Uber and Lyft for speedy online grocery deliveries.

Banking on the aforementioned endeavors, Walmart’s U.S. e-commerce sales soared 50% in the third quarter of fiscal 2018, primarily owing to Walmart.com’s performance. Notably, this includes significant contributions from Walmart’s online grocery service, which has now expanded to over 1,100 locations and is expected to have 1,000 additions next year.

Focus on International Expansion

Apart from having a dominant store and online presence in the United States, Walmart is also gaining from its solid international operations. With operations spread in China, Mexico, Canada and UK, international forms Wal-Mart’s second-largest segment, in terms of revenues. Evidently, international sales constituted about 24% of the company’s total sales in fiscal 2017. This segment has been recording year-over-year currency-neutral sales for more than a year now. In third-quarter fiscal 2018, Wal-Mart’s international sales remained strong with 10 out of 11 markets recording positive comparable store sales (comps). Notably, Mexico and China performed exceptionally well, while results in the UK also improved in the quarter. The departmental biggie remains committed toward achieving growth across all its markets, on the back of its fresh products; expansion of online grocery and private brands. That said, we remain encouraged about Wal-Mart’s International segment performance.

Wal-Mart Stores, Inc. Price and EPS Surprise

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

Together, these factors have been fueling the supermarket biggie’s performance, helping it to put up a stellar show. In third-quarter fiscal 2018, the company’s both earnings and revenues improved year over year and beat the corresponding Zacks Consensus Estimate. Notably, this marked Walmart’s ninth and 13th consecutive quarter of positive earnings surprise and U.S. comps growth. Also, management stated that its food categories performed exceptionally well and recorded the highest comps in about six years.

Strained Margins Raise Concerns

While Walmart’s online strategies have been driving business, 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 have been weighing on its margins. Evidently, these factors caused the company’s gross margin to contract 11 bps and 29 bps in the second and third quarters of fiscal 2018, respectively, and also raises concerns over the upcoming performance.

Final Thoughts & Q4 Expectations in Numbers

Nevertheless, the company remains encouraged about its ongoing performance, as reflected in its raised earnings guidance for fiscal 2018 and favorable comps view for the fourth quarter. In the quarter to be reported, Walmart expects both U.S. comps (excluding fuel) and Sam’s Club comps (excluding fuel) to increase in a range of 1.5-2.0%.

The current Zacks Consensus Estimate for earnings the quarter under review is pegged at $1.36, which shows a 4.6% rise from $1.30 recorded in the year-ago period. This estimate has remained stable in the last 30 days. Moreover, analysts polled by Zacks expect revenues of $135,013 million, up 3.1% from the year-ago quarter.

The consensus mark for Walmart U.S. net sales is currently pegged at $86,250 million, representing a nearly 3% upside from the year-ago reported figure. The consensus estimates for Walmart International and Sam’s Club sales are pegged at $32,564 million and $15,298 million, depicting increases of 5% and 2.1%, respectively.

What the Zacks Model Unveils

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

Though Walmart carries a Zacks Rank #2, its Earnings ESP of -0.55% makes surprise prediction difficult.

Stocks With Favorable Combination

Here are some companies that possess the right combination of elements to post an earnings beat:

Ollie's Bargain OLLI has an Earnings ESP of +5.32% and carries a Zacks Rank of 2. You can see the complete list of today’s Zacks #1 Rank stocks here.

J. M. Smucker SJM has an Earnings ESP of +0.84% and a Zacks Rank #3.

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