Walmart Stock’s Earnings Good — But Not Quite Good Enough
It has been a rather volatile year for Walmart (NYSE:WMT). Walmart stock seemingly has been all over the place, both in terms of its price and its narrative. In a little over a year, WMT stock has gone from under $80 to $110 back to $83 and now, on Friday, trades around $97.
The story has seen some changes as well. Even our own Will Ashworth argued that Walmart simply couldn’t compete with Amazon.com (NASDAQ:AMZN) — then questioned his own judgment a month later. That’s no insult to my fellow contributor; that debate is precisely what is driving WMT up and down, particularly around recent earnings reports.
Coming out of the Q3 report on Thursday morning, the debate is only intensifying. Perhaps surprisingly, given what looked like a solid beat relative to consensus, WMT stock continues to pull back, dropping 2%+ on both Thursday and Friday (as of this writing).
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From here, $97 — and roughly the middle of the trading range in Walmart stock over the past year — looks about right. Walmart can compete with Amazon, but it’s not going to beat Amazon. And there are concerns behind the headline numbers, notably relative to margins.
And at 20x the midpoint of fiscal 2019 (ending January) EPS guidance, it’s not as if WMT stock necessarily is cheap. In fact, it’s still more highly valued than it has been for the past decade. While Walmart is making some progress, at least much of it already looks priced in.
Walmart Earnings
The beauty of the Q3 report from Walmart is in the eye of the beholder. On the top line, overall revenue growth missed consensus by about 0.4 points of growth. But the international business had a big currency effect, and U.S. sales were strong. Same-store domestic sales rose 3.4% against Street estimates of 3.1%. Full-year guidance of “at least 3%” on that front suggests the company’s fastest growth in a decade.
On the bottom line, meanwhile, Walmart earnings came in 7 cents ahead of the Street. Adjusted EPS guidance for the full year of $4.75-$4.85 perfectly brackets consensus of $4.80. That does suggest a modestly weaker Q4 than expected, in terms of profits, however.
All told, it’s a mixed quarter. And from that standpoint, the declines in Walmart stock make a bit of sense. WMT was at a nine-month high ahead of the release. Investors were pricing in a great quarter from Walmart. They merely may have received a good one.
The Bull Case for WMT Stock
That said, there’s a case for buying the post-earnings dip here. Taking a step back, the news here looks rather positive.
Most notably, e-commerce sales rose a sizzling 43% in the third quarter, after 40% gains in Q2. Some of that growth is coming from acquisitions, admittedly. But WMT stock had fallen sharply after online sales decelerated back in Q4. Two straight quarters of 40%-plus growth suggest Walmart’s omnichannel strategy is working — and that the company is taking share not only from Amazon, but from Target (NYSE:TGT) as well.
That growth is helping sales, but it doesn’t appear to be cannibalizing in-store revenue. E-commerce added 140 bps to U.S. comp growth — but in-store sales still rose 2%, about in line with where the company was growing over the past few years.
Particularly on the top line, the numbers suggest that Walmart simply is becoming a better, more attractive retailer. And if that continues, given the thin margins in retail, that trend can drive impressive earnings growth and put Walmart stock into the triple digits for good.
The Bear Case for Walmart Stock
The concerns here come down to margins. For the year, operating margins actually have held up reasonably well. Better revenue growth has allowed operating expenses to leverage — and offset compression in gross margin.
The question is whether that can hold. Walmart already is investing billions in terms of building out its e-commerce business, increasing labor expense, and improving overall service. It has to spend that money while adhering to its long-treasured “always low prices” model, which leaves little room for error.
Indeed, Walmart stock has guided toward another year of solid comp sales next year, which should keep margins intact. But heading into year 10 of an economic expansion, it’s fair to wonder what happens when that inevitably changes. Amazon’s ability to compete on price will remain intact — but it has already built out many of the capabilities WMT now is developing. With Walmart’s EBIT margins at just ~3.5%, even a move in comp growth from the current 3%-plus back to 1-2% has a significant impact on net profits.
More broadly, my concern is that Walmart is competing, but not necessarily on its own terms. It’s matching Amazon because it has to. The grocery side of the business is under significant pressure, as seen in weakness of stocks like Kroger (NYSE:KR) and the abandoned merger between Rite Aid (NYSE:RAD) and Albertsons.
This still is a very tough business, as good as WMT is at it. And with Walmart stock at 20x earnings, not all of those challenges look priced in. Walmart is doing a good job — but it has to do so for a long time. And even if it does, I’m not sure how much earnings growth, or multiple expansion, is left, even with back below $100.
As of this writing, Vince Martin has no positions in any securities mentioned.
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