Walmart hasn’t missed earnings estimates in three years.
Retail stocks are often viewed as a bellwether for the economy, as their performance is indicative of where one of the leading economic drivers – consumers – are at.
Walmart (NYSE:WMT), the nation’s largest retailer, is, itself, a leading indicator. It has historically tended to outperform during more difficult or sluggish economic cycles, because of its discounts. But with the impact of tariffs, and a recent push to expand its customer base to shoppers in higher income brackets, Walmart has been undercut somewhat by deeper discounters, like Dollar General (NYSE:DG), for example.
So far this year, Walmart stock has done well, up 13% year-to-date and outperforming rivals like Target and Costco. But it has fallen far short of Dollar General stock, which has skyrocketed some 51% YTD.
But on Wednesday, Walmart stock opened about 4% lower after a rare earnings miss in the second quarter – it’s first miss in the last 12 quarters. Here are the key Q2 numbers:
- Revenue of $177.4 billion, up 4.8% year-over-year. This beat estimates of $175.9 billion.
- Operating income of $7.3 billion, down 8.2% year-over-year.
- Earnings per share jumped 57% to 88 cents per share.
- Adjusted operating income of $8 billion, up 0.4%.
- Adjusted EPS was 68 cents per share, short of the 73 cents per share that analysts expected.
The adjusted earnings were lower as they excluded one-time gains related to equity and other investments, as well as certain legal costs and business restructuring charges. The earnings miss, however, is mainly due to higher-than-expected self-insured general liability claims expenses, which contributed to a 560-basis-point headwind.
Traffic is up, so are prices
The earnings miss doesn’t seem to be too much of a concern, given the circumstances. However, expenses rose faster than revenue as cost of sales rose 4.7% and SGA expenses jumped 8%.
And there were certainly some positives. Traffic was up 1.5%, as measured by the number of transactions Walmart processed in the quarter. However, this is down from a 3.6% traffic increase in the same quarter a year ago.
Also, ticket prices were up, which suggests that prices were higher. The average ticket was up 3.1%, which means that each shopper paid about 3.1% more per trip. That could mean they are buying higher-priced merchandise, or it could mean that prices on the goods they normally buy are up. Last year in this same quarter the average ticket was only up 0.6%.
It could be a combination of both, but one thing that is certain is that prices are going up, as CEO Doug McMillon said on the earnings call. McMillon said on the call that prices have increased every week due to tariffs, reported the New York Times.
Lifting its guidance
While Q2 results were mixed, Walmart sees the outlook improving somewhat for the rest of the fiscal year. In its guidance it calls for:
- Q3 net sales targeted to increase 3.75% to 4.75%, including roughly 20 bps tailwind from the Vizio acquisition.
- Q3 operating income to increase 3.0% to 6.0%, including 140 bps headwind from Vizio acquisition.
- Q3 adjusted EPS 58 cents to 60 cents.
- Full fiscal year net sales to increase 3.75% to 4.75%, up from previous guidance of 3% to 4%.
- Full FY adjusted EPS to rise $2.52 to $2.62, including a 2 cent to 3 cent headwind from currency.
Investors were not all that impressed however, as the stock price dropped some 4% on Thursday to around $98 per share.
The Blue Chip Daily Trend Report maintained its hold rating for Walmart stock after earnings.
“Our hold rating is based on Walmart’s forward P/E ratio of 33.3 vs sales growth of 4.8% and slow EPS growth of only 1.5%. Walmart stock trades at a P/E premium to the S&P 500 index, with sales and earnings growth that is well below the index,” explained Larry Tentarelli, chief technical strategist at the Blue Chip Daily Trend Report. “The stock has been range bound between $93 to $105 for the past 4 months and it is trading in a sideways consolidation currently. We view Walmart as a long-term core retail holding but expect it to perform inline or to underperform vs the S&P 500 index over the next 12 months.”
Walmart stock has a median price target of $111 per share among the analysts that cover it, suggesting 13% upside. But it is not cheap, with a high P/E of 48 and a forward P/E of 39. It’s not screaming buy right now, but certainly a hold if you own it.
