Walmart (WMT) Down 1.2% Since Last Earnings Report: Can It Rebound?

It has been about a month since the last earnings report for Walmart (WMT). Shares have lost about 1.2% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Walmart due for a breakout? 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 catalysts.

Walmart Q4 Earnings Beat Estimates, Increases Year On Year

Walmart posted solid fourth-quarter fiscal 2019 results. Walmart’s adjusted earnings came in at $1.41 per share, which came way ahead of the Zacks Consensus Estimate of $1.33. Further, earnings improved about 6% year over year. We believe that enhanced sales and higher operating income fueled bottom-line growth. Including one-time items, Walmart reported earnings of $1.27 per share, which surged 74% year over year.

Total revenues advanced 1.9% to $138.8 billion that fell slightly short of the Zacks Consensus Estimate of $139.3 billion. The year-over-year upside was driven by strength in the U.S. business. On a currency-neutral basis, total revenues grew 3.1% to $140.5 billion.

Consolidated gross profit margin contracted 27 basis points (bps) to 23.8% on account of pricing, elevated transportation expenses and e-commerce mix impacts.

Consolidated operating income jumped 35.8% to $6.1billion. On a constant-currency (cc) basis, operating income increased nearly 38% to $6.2 billion.

Segment Details

Walmart U.S.: The segment recorded net sales growth of 4.6% to $90.5 billion in the quarter. U.S. comps, excluding fuel, improved 4.2% backed by 0.9% rise in traffic and 3.3% in ticket. Notably, U.S. comps, on a two-year stack basis, marked its highest improvement in 9 years.

Further, e-commerce sales drove comps by 180 bps. E-commerce sales improved on the back of enhanced online assortment and increased grocery pickups. Operating income at the segment increased 7.3% to $5 billion.

Walmart International: Segment net sales slipped 2.3% to $32.3 billion. On a currency-neutral basis, net sales inched up 2.7% to $34 billion, with three (Mexico, Canada and U.K.) out of four largest markets registering positive comps. Operating income at this segment fell 9.9% to $1.2 billion. On a currency-neutral basis, operating income dropped 2.8% to $1.3 billion.

Sam’s Club: The segment, which comprises membership warehouse clubs, saw its net sales decline 3.7% to $14.9 billion. Sam’s Club comps, excluding fuel, rose 3.3%. Tobacco dented comps by nearly 200 bps. While traffic increased 6.4%, ticket was down 3.1%. E-commerce fueled comps by nearly 90 bps. Segment operating income came in at $0.4 billion.

Other Financial Updates

In fiscal 2019, Walmart generated operating cash flow of $27,753 million and incurred capital expenditures of $10,344 million, resulting in free cash flow of $17,409 million. Walmart allocated $1,505 million toward dividends and made share buybacks worth $3,249 million during the fourth quarter.

Capital expenditures are expected to be nearly $11 billion in fiscal 2020.

Also, the company plans to open less than 10 U.S. stores and little more than 300 international stores in fiscal 2020. Walmart International store openings will be mainly concentrated on China and Walmex.
 
Recent Developments & View

Management is impressed with its solid results and encouraged about the rosy U.S. economic scenario. Further, the company focuses on boosting innovations and leveraging technology to drive growth. Walmart also is hopeful about consumers’ continued favorable response to its omnichannel offerings. Notably, the company expects roughly 3,100 grocery pickup locations and about 1,600 grocery delivery locations by the end of fiscal 2020.

Considering these factors, the company reiterated its outlook for fiscal 2020, which was issued on Oct 16. The company anticipates consolidated net sales to rise at least 3%, including benefits from Flipkart, adverse impacts from Walmart Brazil’s deconsolidation and planned tobacco sales cut downs at Sam’s Club.

Notably, Walmart U.S. e-commerce net sales are expected to surge about 35% year over year and Walmart International net sales are expected to increase approximately 5% at cc.

U.S. comps are expected to advance 2.5-3% (excluding fuel). Comps at Sam’s Club are likely to grow roughly 1%, excluding fuel, and nearly 3%, excluding tobacco fuel.

Further, management expects consolidated operating income to fall low-single digits, including Flipkart, and rise low-single digits, excluding Flipkart.

Finally, earnings are envisioned to decline at a low-single-digit rate year over year, whereas the same is expected to increase in a low to mid single-digit rate, excluding Flipkart.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -6.34% due to these changes.

VGM Scores

Currently, Walmart has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. Charting a somewhat similar path, 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 B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, 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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