We expect Wal-Mart Stores Inc. (WMT - Free Report) to beat expectations when it reports third-quarter fiscal 2017 results before the opening bell on Nov 17.
Last quarter, this retail giant posted a positive earnings surprise of 4.90%. We note that the company has posted positive earnings surprises in all the trailing four quarters, translating to an average positive surprise of 6.13%.
Let’s see how things are shaping up prior to this announcement.
Why a Likely Positive Surprise?
Our proven model shows that Wal-Mart is likely to beat earnings this quarter because it has the right combination of two key ingredients.
Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, stands at +1.04%. This is a meaningful and leading indicator of a likely positive earnings surprise.Please check our Earnings ESP Filter that enables you to find stocks that are expected to come out with earnings surprises.
Zacks Rank: Wal-Mart carries a Zacks Rank #3 (Hold), which when combined with a +1.04% ESP makes us confident of an earnings beat.
Note that stocks with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 have a significantly higher chance of beating earnings. Conversely, the Sell-rated stocks (#4 or 5) should never be considered going into an earnings announcement.
What is Driving the Better-than-Expected Earnings?
Wal-Mart has been striving to understand the evolving needs of its customers to regain their confidence and thus, boost sales. It has delivered positive comps in the U.S. in the last eight quarters. Lower fuel prices aided sales by easing consumers’ spending power. E-commerce has also contributed to the company’s top line. Management expects the trend of positive comps at Wal-Mart U.S. to continue in the to-be-reported quarter.
Wal-Mart expects U.S. comp sales growth of around 1%−5% for the third quarter ended Oct 28, 2016 compared with 1.5% comps growth last year. Sam’s Club comp sales, without the impact of fuel sales, are expected to be slightly positive in the to-be-reported quarter.
Wal-Mart is also making huge investments in e-commerce initiatives to compete with the biggest online retailer, Amazon.com (AMZN - Free Report) as well as to improve customer service. In this regard, in June, Wal-Mart inked a deal with JD.com, the second-largest online retailer in China, to sell its Chinese e-commerce business, Yihaodian to JD.com in exchange for a 5% equity stake in the company. Wal-Mart has completed the acquisition of e-commerce company, Jet.com, Inc. in the U.S. and is also in talks to acquire a stake in India's largest e-commerce firm, Flipkart Online Services Pvt., in order to expand in the fast-growing online retail market.
Moreover, the Bentonville, AR-based company is paying higher wages to its workers and training them to improve its stores performance. However, these initiatives have increased expenses for the company. This, along with unfavorable currency, will take a toll on earnings.
In the third quarter of fiscal 2017, earnings are expected in a range of 90 cents to $1.00 per share, compared with the prior-year quarter’s earnings of $1.03 per share.
Other Stocks to Consider
Some other stocks in the broader retail sector that have both a positive Earnings ESP and a favorable Zacks Rank are:
Dave & Buster's Entertainment, Inc. (PLAY - Free Report) , with an Earnings ESP of +15.39% and a Zacks Rank #3. You can seethe complete list of today’s Zacks #1 Rank stocks here.
Foot Locker Inc. (FL - Free Report) , with an Earnings ESP of +0.91% and a Zacks Rank #2.
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