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Why Walmart stock has suddenly popped ahead of earnings

·Anchor, Editor-at-Large
·3 min read
In this article:
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The world's largest retailer sees its stock come alive again, finally.

Walmart's stock (WMT) has widely lagged the S&P 500 (^GSPC) this year (3.8% gain for Walmart vs. 18% gain for the S&P 500) as investors fret about slowing sales and earnings growth after a big year of consumers stocking up during the height of the pandemic in 2020. Inflation in labor and transportation (as mentioned by vendors to Walmart in the past few weeks such as Clorox, Proctor & Gamble and Kimberly-Clark) and what that means to Walmart's thin profit margins hasn't aided sentiment on the stock in the market, either. 

But shares of Walmart have interestingly tacked on nearly 6% in the last month (S&P 500 +2%) — mostly fueled in the past two weeks — ahead of the retailer's closely watched second quarter earnings report on Tuesday. J.P. Morgan analyst Christopher Horvers explains the move higher in Walmart's stock makes sense, and is a bit overdue. 

"The general sentiment on the stock [is] much more positive over the past month given (1) its dramatic underperformance to retail and staples over the past 12-18 months; (2) July trend improvement on easier compares/back-to-school and the child tax credit (similar to Target/others); and (3) the general shift toward more defensive stocks," Horvers points out in an earnings preview note to clients. 

Whether Walmart's stock sustains its recent gains is obviously dependent upon how second quarter earnings shook out and the company's guidance. Expectations for the second quarter appear on the bullish side of things, raising the potential for a take-profits-on-the-news type of earnings day for Walmart. 

Eyes on earnings guidance

Whisper numbers on the Street expect Walmart's key U.S. business to post a same-store sales increase of 4% to 6% for the quarter. Walmart's guidance communicated a few months back call for a second quarter U.S. same-store sales gain of low-single digits (percentage). 

Staying on those Street whisper numbers, second quarter earnings are seen hitting $1.65 a share (consensus $1.55). Walmart guided to an earnings decline of low-single digits from $1.56 a year ago.

Given those heightened expectations on the quarter and strong potential for Walmart to say the third quarter has started well, the Street is likely banking on a strong full-year earnings guidance lift from Walmart to sustain the stock's recent gains. Currently, Walmart's full-year profit outlook calls for a low-double digit increase year-over-year excluding exited businesses. 

But considering the economic uncertainty around the COVID-19 Delta variant and how it may impact consumer spending during the important back-to-school and holiday shopping seasons, Walmart could take a more muted tone on guidance much to the letdown of the bulls. 

Horvers says he understands the appeal of Walmart's stock right now, but suggests sitting out on the name into earnings.

"Net-net, while the stock underperformance and defensiveness given the Delta variant is appealing, at 24x our estimate, we think the stock is relatively full with the market unlikely to roll forward 2Q stacks (though we are positive Walmart could at least hold earnings flat in 2022)," Horvers adds.

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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