Feb 15, 2019

Walmart Margin in Focus for Analysts, Market Share Gains Likely

Janet Freund, Bloomberg News

Cashiers ring up shoppers at a Walmart Inc. store in Burbank, California. , Bloomberg

(Bloomberg) -- Walmart Inc. investors aren’t expecting any surprises in its fourth-quarter results, or the annual forecast either for that matter, but there are certainly items that will still be closely watched when the world’s largest retailer issues its quarterly report Tuesday, February 19.

The Arkansas-based chain has been reinvesting in its business in areas of digitalization, drive-through grocery pickup, acquisitions of digitally native e-commerce brands, and activating same-day delivery across the chain.

That’s paid off in terms of market share gains and sales support. But it’s also come at a cost, and analysts expect a continued contraction in EBIT margin this quarter, albeit an eventual turn at some point in fiscal 2020. Flipkart-related losses will also likely weigh on results too.

Comparable store sales are always a focal point of the quarterly report. Analysts expect growth in the U.S. channel to outperform international results, which likely have been hurt by U.S.-China trade and Brexit concerns.

Here are additional comments that Wall Street analysts made ahead of the next week’s earnings:

Morgan Stanley, Simeon Gutman

“Some puts and takes but expect roughly in-line 4Q results”
A pull forward of SNAP (Supplemental Nutrition Assistance Program) payments should benefit comps in 4Q, but to the detriment of 1Q; expects ~40% e-commerce growth for the quarter
While better cost management and related margin expansion are “key pillars of our overweight thesis,” WMT’s U.S. margin is unlikely to expand before the second half of the year
Estimates ~40 bps U.S. EBIT margin contraction and 8% EBIT decline in 4Q
Expects core FY 2020 forecast to be reaffirmed; 2 main risks to monitor is that WMT’s U.S. guidance is likely back-half weighted “as cost out efforts take time to ramp” and recently introduced regulations in India could result in higher Flipkart losses
Rates overweight, price target $110

What Bloomberg Intelligence is saying:

“Walmart is poised for a solid 4Q thanks to what was likely a strong holiday season, with improved operations and effective merchandising driving traffic into stores and higher online spending.”

“The company is expected to deliver same-store sales gains above its full-year forecast of at least 3%, even with strong results in the prior year.”

“Walmart is improving expense discipline. Even so, gross margin may contract 73 bps in 4Q on investments to keep prices low amid higher costs and a mix effect from higher e-commerce sales including strong growth in online grocery. It will also be the first full quarter including the Flipkart deal, which will be dilutive to earnings.”--Jennifer Bartashus

Telsey Advisory, Joseph Feldman

Walmart U.S. results will be solid, given favorable macro trends (jobs, wages, and gas prices), benefits from investments in prices, improved freshness in produce, higher in-stock levels, enhanced merchandising (private brands and exclusive partnerships with Ellen DeGeneres and Sofia Vergara), and an expanded toy assortment
- Headwinds include U.S. government shutdown (December 22-January 25) and bitterly cold weather in parts of the U.S. last month
International comp. sales may fall amid FX headwinds in Canada, Mexico, and the UK, deconsolidation in Brazil, and a slowdown in some markets, such as the UK (Brexit) and China (U.S./China tariffs)
Estimates digital sales growth ~35% in 4Q
Expects Walmart to maintain its preliminary year EPS guidance
U.S.-China tariffs and India e-commerce are likely to be key topics on the call
Rates outperform, PT $113

RBC Capital Markets, Scot Ciccarelli

Estimates 4Q EBIT margin to contract ~30 bps y/y to 4.5% and EBIT dollars to decline 5.8% y/y to ~$6.2 billion
“Walmart’s changes/improvements have resulted in impressive sales growth/market share gains and its emergence as Amazon’s biggest competitor”
That said, these improvements and e-commerce losses “have also led to margin compression and sharp EBIT $ declines over the past 4+ years,” which is part of the bear case RBC hears from investors
“We are bullish on Walmart’s improvements but think further multiple expansion will be difficult/modest without an acceleration in profit growth”; rates sector perform

Quo Vadis Capital, John Zolidis

Expects “solid sales and traffic growth across both the store and e-commerce and believe there could be some upside to Street comp. forecasts”
Walmart’s year forecast likely features a “robust sales outlook, but possibly not above the Street’s current +2.5% forecast”
That said, EBIT margin pressure exists from WMT’s investments in the business, including absorbing losses from Flipkart; excluding Flipkart losses, expects WMT to “guide conservatively but for growth”
Market share gains will eventually result in “EBIT dollar and percentage growth upon a much larger base of revenues, resulting in a positive re-rating for the equity”

Just the Numbers

4Q adjusted EPS estimate $1.33 (range $1.29-$1.42)
4Q revenue estimates $138.77 billion ($135.7b-$140.8b)
4Q Walmart U.S. stores comps. ex-fuel estimate +3.2% (Consensus Metrix, average of 20)
- Sam’s Club comps. ex-fuel/FX estimate +2.9% (CM, avg of 15)
- Consolidated comp. sales ex-fuel/FX estimate +2.9% (CM, avg of 11)
4Q gross margin est. 23.9% (23.6%-24.6%)
4Q Ebitda estimate $8.79b ($8.52b-$9.12b)
FY20 adj EPS estimate down 2% y/y to $4.75; WMT forecast down in low-single digit percentage range (Oct. 16)
FY20 revenue estimate up 3% to $528.9b; forecast 3% or greater growth
- WMT targeted FY20 U.S. comp sales growth ex-gas of 2.5%-3.0% and operating income down in low-single digit percentage range, including Flipkart
FY20 capex est. $11.12b; co. forecast $11b

Data

Walmart implied one-day share move following earnings 3.8 percent: Bloomberg data
Shares rose after 6 of prior 12 earnings announcements
15 buys, 20 holds, 0 sells; average price target $107: Bloomberg data
Walmart shares down 3.7% in past year vs Target Corp. down 3.7%, S&P 500 up 1.4%

Timing