Wal-Mart Stores Inc (NYSE: WMT) is doomed, retail is dead and Amazon.com ( AMZN) is the reaper’s scythe — or at least, so goes the narrative. But you’ll have to apologize if this all seems new to WMT stockholders, who are sitting on market-beating returns of 16 percent in 2017.
Kidding aside, this has been a brutal year for retail, with former giants such as Macy’s ( M) and J.C. Penney Co. ( JCP) shedding roughly 40 percent and 50 percent, respectively, and the broader SPDR S&P Retail ETF ( XRT) off by nearly 10 percent.
Walmart seems particularly ill-positioned this year, what with Amazon already challenging it with its legacy e-commerce business, then bolstering its muscle for the grocery fracas by snapping up Whole Foods Market ( WFM).
[See: 9 Investing Steps From Warren Buffett’s Playbook.]
And yet, Walmart stands days away from its Thursday morning earnings report with pleased shareholders and even optimism from the analyst community.
The headline numbers. Wall Street’s expectations for Walmart’s second-quarter earnings report are nothing to do cartwheels over. Projections are for a bottom line of $1.07 per share that would be unchanged year-over-year, and top-line expansion of just 1.7 percent.
Given the recently reported sales declines from Macy’s and Kohl’s Corp. ( KSS), not to mention even more anemic second-quarter expectations for rival Target, that’s not much reason for pessimism. The flip side, though, is not even Street-beating results were able to keep M and KSS from selling off heavily following their results. Thus, Walmart’s ability to manage expectations — evidenced by its string of beats dating back to midway through calendar 2015 — mean a beat, while likely, won’t necessarily be enough to keep fueling this recent rally in WMT stock.
Walmart, the survivor. Walmart joined a host of companies with grocery businesses in dropping like rocks back in mid-June, when Amazon announced its purchase of organic grocer Whole Foods for $13.4 billion. The premise is twofold — that Amazon will make Whole Foods’ offerings more competitive on price, and that Whole Foods will act as a distribution network for the AmazonFresh delivery service — a two-pronged attack on brick-and-mortar businesses with grocery businesses, whether it’s pure plays like Kroger Co. ( KR), warehousers like Costco Wholesale Corp. ( COST) or big-box retailers like Walmart and Target.
But while investors were busy selling the narrative, Wall Street was quick to warn, “Not so fast!”
In mid-July, once some of Whole Foods’ quinoa dust had cleared, Goldman Sachs not only upgraded WMT stock from “neutral” to “buy,” but went so far as to add it to its list of the analyst house’s top ideas.
Analyst Matthew Fassler said Walmart is “well positioned as any mass market retailer” and can “sidestep the juggernaut,” referring to Amazon and its e-commerce heft.
[Read: The Retailers’ Guide to Beating Amazon.]
That’s in large part because Walmart has been both prudent and aggressive in expanding its own web capabilities, acquiring the likes of ModCloth, Bonobos and Moosejaw this year alone, though most important was its 2016 buyout of rapidly expanding Jet.com in August 2016 and putting CEO Marc Lore in charge of Walmart eCommerce U.S. That last acquisition has paid off in spades, with Walmart boasting a 63 percent jump in digital sales last quarter that sparked a quick run in WMT.
And while Amazon does appear to be a long-term threat to Walmart’s grocery business, Oppenheimer’s Rupesh Parikh nonetheless slapped an “outperform” rating on WMT stock in early August, calling it “fresher than it’s been in years” and stating Walmart is poised to grab even more grocery market share.
Walmart’s e-commerce merger and acquisition spree is behind some of that optimism, but so are other grocery initiatives, including giving more exposure to private-label brands and widening its offerings of “fresh products.” It’s also making personnel shifts, such as creating separate leadership roles for its deli and bakery businesses.
How much of that filters into Thursday’s report remains to be seen, though groceries could be a strong spot, with July’s Consumer Price Index showing an uptick in food prices for the first time since November 2015. It’s also vital that Walmart show continued breakneck growth in its e-commerce operations.
Competitors also have provided a couple of positive foreshadowing, including Target upgrading its Q2 forecast and Macy’s and Kohl’s results — which while far from good were still better than expected. It may be that Walmart’s estimates include a similar abundance of pessimism, making the bar a little easier to clear.
That doesn’t necessarily make WMT stock a lock to jump this Thursday. But Walmart still is a best-in-class retailer, and an earnings disaster appears unlikely.
More Earnings in Focus
Target Corp. ( TGT). Target shares have rebounded 10 percent over the past month — even including a recent sympathy dip alongside Macy’s and Kohl’s — versus less than 2 percent gains for the XRT. Credit goes to a mid-July upgrade in the company’s second quarter forecast, with the company expecting a “modest increase” in same-store sales and earnings above the high end of its previous range of 95 cents to $1.15 per share. Target announces second-quarter results Wednesday morning, when analysts will be looking for fractional revenue growth to $16.3 billion on a 5 percent year-over-year decline in profits to $1.17 per share.
Alibaba Group Holding (BABA). Alibaba sent Wall Street into a frenzy back in June when it announced an aggressive forecast for current-year revenues. The Chinese e-commerce titan said at the time it expects 45 to 49 percent top-line growth, blowing the consensus estimate of 31 percent revenue expansion out of the water. Part of the optimism there comes from blossoming businesses such as the cloud, as well as travel service platform Fliggy, which is the subject of a joint venture with Marriott International ( MAR). JPMorgan analyst Alex Yao said in a bullish June note that marketing data services will push BABA stock to $190, some 25 percent higher from current prices. We’ll see if reality matches hope Thursday before the opening bell. Analysts expect BABA to report a 25 percent jump in profits on 47.5 percent revenue growth to $7.06 billion.
This Week’s Earnings Calendar
Monday. JD.com ( JD), Sysco Corp. ( SYY)
Tuesday. Agilent Technologies ( A), Advance Auto Parts ( AAP), Coach ( COH), Dick’s Sporting Goods ( DKS), Home Depot ( HD), TJX Cos. ( TJX), Urban Outfitters ( URBN)
Wednesday. Cisco Systems ( CSCO), L Brands ( LB), NetApp ( NTAP), Target, Vipshop Holdings ( VIPS)
[See: 7 of the Best Stocks to Buy for 2017.]
Thursday. Alibaba, Applied Materials ( AMAT), Gap ( GPS), Madison Square Garden Co. ( MSG), Ross Stores ( ROST), Walmart, Zoe’s Kitchen ( ZOES)
Friday. Deere & Co. ( DE), Estee Lauder Cos. ( EL), Foot Locker ( FL)
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Can Wal-Mart Stores Inc (WMT) Stock Stay Hot? originally appeared on usnews.com
