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Walmart is the perfect mix of 'offense and defense': Analyst

Walmart's second quarter earnings surged past expectations, driven by strong online sales. D.A. Davidson Senior Research Analyst Michael Baker joins the On the Move panel to discuss.

Video Transcript

ADAM SHAPIRO: We want to talk about Home Depot earnings, as well as Walmart and a whole lot more, because it is so crucial to where we are headed. And to help us understand what to take from these earnings reports, we invite into the stream Michael Baker from D.A. Davidson. He is senior research analyst. He's joining us from Boston.

Michael, it's good to have you here. And I guess let's start with Home Depot. No surprise that when we're all locked in and we're bored out of our minds after work that maybe it's time to finally update the house, right?

MICHAEL BAKER: Exactly, yeah. We expected these types of comps. The industry data that we tracked prior to them reporting we're at all-time highs. So this kind of comp, while certainly impressive, was really about as expected, maybe a little bit higher. But I think most observers were expecting something in the 20%.

You said it, right, and it's consistent with our theme of stay, play, earn, and learn from home. This is what we're doing. Everyone's coming home and playing outside or fixing up their outdoor, their deck, or interior spaces. And we, frankly, think it's going to last for some time.

JULIE HYMAN: Well, that was going to be my question, Mike. It's Julie here. It's good to see you. So this sustainability, whether you're talking about the trends that helped Home Depot or helped Walmart, for that matter-- are some of these changes going to be more consistent in terms of people buying online and maybe buying more?

I mean, we saw a lot of the average transactions go up, even as the number of transactions went down. Are these kinds of trends going to have staying power?

MICHAEL BAKER: Right, we're seeing a little bit of trip consolidation as people probably want to spend less time going to stores, and therefore will buy more each time they go to a store. And the greater online penetration lends itself to a higher ticket, because you tend to buy more online. So I guess I'd say this-- pretty confident that trends will start to revert somewhat to the mean. In other words, no, Home Depot is not going to comp at 25% forever. It will decelerate.

But I think there is some staying power to these trends, these stay, play, earn, and learn-from-home trends, such that over time, the same-store sales will be better than they were prior to the pandemic. Again, they're not going to comp at 20% forever. Walmart's not going be able to keep up 9 and 1/2% forever. Those will decelerate. But I think for the retailers that are well-positioned, we're going to see some better-than-historical-norm same-store sales be sustainable.

ADAM SHAPIRO: Well, Mike, you've just explained why you have a neutral rating on Home Depot. But you also said you're waiting for a pullback. I realized if we could all time this, we'd all be gazillionaires. But really, when-- what would be the signs of the pullback, do you think? Because we don't see that the pandemic lockdown down ending really in the next six months to a year.

MICHAEL BAKER: Fair. And to that point, Home Depot's trends were really strong this quarter, not only-- really the quarter, but throughout the quarter and into the beginning of the third quarter, where they're still probably up 20%. So we're not going to see that pullback right now. At some point, though, I do think comps will decelerate. And when that happens, if the market does sell the stock, we think that that would present a better opportunity.

BRIAN CHEUNG: Hey, Mike, it's Brian Cheung here. So Walmart, I want to expand a little bit on that. You initiated coverage recently with a buy rating. I believe your target's $148, so still some leg work to go if we're looking at the stock right now over $130. But they knocked it out of the park this morning when you look at specifically their e-commerce sales, up 97%.

Tell us a little bit more about what the major story is with Walmart. It's been described in the past as a defensive stock. But as we've seen from the e-commerce numbers that they had this morning, it seems like they're also riding this wave of this post-COVID world as well.

MICHAEL BAKER: Well, that's exactly right. And when we initiated it, one of the things we talked about was we think Walmart is the right combination of offense and defense. We do think they have some great offensive characteristics. But if we're wrong and the market melts down for whatever reason, then Walmart outperforms because of those defensive characteristics. And it's that combination to us it makes it an attractive stock.

In terms of the offensive capabilities, if you will, a couple of things that we highlighted, as you talked about it, was the e-commerce growth of 97%. What Walmart has done over the past four or five years to us is pretty amazing, where they were arguably late to the e-commerce business, but now they have really embraced their omnichannel capabilities in their stores as assets rather than liabilities. And that has enabled them to accelerate their e-commerce growth and put them in a good position to take advantage of what's going on with the COVID situation, now which none of us could predict. But because of the investment that they made in the past, they're able to leverage that and see this outsized e-commerce growth and really compete much more effectively with Amazon.

Another key number in the quarter really related to that was their strength in the general merchandise sales, which, of course, higher margin. And that was up in the mid-teen, even high-teen range this quarter versus single digits last quarter. And again, I think that's a function of a lot of the initiatives that the company has been embarking on over the last few years to try to move that e-commerce business to not just focus only on grocery, but also to take advantage of some of the higher margin, more discretionary parts that we really saw that play out this quarter.

ADAM SHAPIRO: Michael Baker is with D.A. Davidson. He's senior research analyst. We appreciate your insight on these markets and these stocks here "On the Move."