Walmart Inc. (WMT - Free Report) is slated to release fourth-quarter fiscal 2019 results on Feb 19. The world’s largest retailer has been posting positive earnings surprise for three consecutive quarters now, backed by its splendid omnichannel efforts. Notably, Walmart has long been committed toward enhancing its stores experience and e-commerce strategies to counter Amazon’s (AMZN - Free Report) rising dominance.
Let’s see if these endeavors can help this supermarket biggie retain its sturdy record this time around as well.
What to Expect?
The Zacks Consensus Estimate for fourth-quarter earnings has gone up by a notch in the past 30 days to $1.33, which is in line with the year-ago quarter’s figure. Further, the consensus mark for revenues is $139.3 billion, depicting rise of 2.2% from the year-ago quarter’s figure.
Sturdy Comps Run Bodes Well
Walmart has been gaining from its sturdy comparable store sales (comps) record, which is driven by the company’s constant expansion efforts and splendid e-commerce performance. Incidentally, Walmart has been undertaking several efforts to enhance merchandise assortments. Also, the company is on track with store remodeling, in an attempt to upgrade them with advanced in-store and digital innovations. Walmart is also gaining from its compelling pricing strategy, which helps it draw customers.
Well, such trends drove the company in third-quarter fiscal 2019, which marked Walmart’s 17th consecutive quarter of U.S. comps growth. Favorable demand for Walmart’s omnichannel offerings buoyed results. Moreover, e-commerce sales positively impacted quarterly comps at Walmart U.S. by 140 basis points (bps). Talking of e-commerce, Walmart is trying every means to evolve with the changing consumer environment to compete with e-Commerce king Amazon. In this regard, the company has been taking several initiatives, including buyouts, alliances, and improved delivery and payment systems.
Walmart’s strategic partnership with Microsoft (MSFT - Free Report) ; buyouts of ShoeBuy, Moosejaw, Bonobos, ModCloth and Jet.com; and deals with Rakuten, and Lord and Taylor underscore its quest to build an impressive digital brand portfolio. Further, the company’s plans to venture into the subscription-based video streaming arena, improve its website, launch Bonobos and Nike (NKE - Free Report) on Jet.com, and enhance check-out process and payment system highlight its initiatives to accelerate online business. Moreover, Walmart is making aggressive efforts to expand in the booming online grocery space, which was a major contributor to the company’s e-commerce sales in the third quarter.
To this end, Walmart’s alliances with Jet.com and Blue Apron to provide on-demand meal kits are noteworthy. Also, the company recently raised its stake in Dada-JD Daojia to 10% to strengthen its last-mile delivery service and further enhance omni-channel offerings. Additionally, Walmart’s deal with Postmates and DoorDash along with its acquisition of Parcel highlight its focus on enhancing grocery sales. Further, the company’s Walmart Pickup program enables customers to place orders online and then pick them up at a store for free. In earlier developments, Walmart partnered with ride hailing services, Uber and Lyft for speedy online grocery deliveries, while it also tested same-day delivery with Deliv. We believe that these actions help Walmart offer multiple choices to online grocery shoppers amid increasing competition from Amazon. Such efforts are likely to help Walmart maintain its spectacular U.S. comps trend in the fourth quarter. Markedly, the Zacks Consensus Estimate for U.S. comps (excluding fuel) growth is pegged at 2.9% for the impending quarter, up from 2.6% recorded in the same period last year.
Will Margin Woes be Offset?
While Walmart’s online strategies have been driving its business, costs associated with investments in e-commerce expansion and technological advancements, the mix impact from growing e-commerce operations and the company’s compelling pricing strategy have been weighing on its margins. Evidently, these factors caused the company’s gross margin to contract 11 bps, 29 bps and 61 bps in the second, third and fourth quarters of fiscal 2018, respectively. During the third quarter of fiscal 2019, gross margin contracted 21 bps on account of price investments in various markets, elevated transportation expenses and e-commerce mix impacts. Management had earlier projected margins to remain pressurized in fiscal 2019, which makes us slightly cautious.
However, Walmart’s aforementioned growth endeavors and focus on improving International business should help it offset margin woes and sustain growth. Notably, Walmart is making continued efforts to shift focus from underperforming areas to profitable regions like India and China. This is clear from the company’s decision to merge its soft U.K. grocery unit, Asda with Sainsbury and sale of 80% of its stake in the underperforming Brazilian business. The company also acquired majority stake in India’s leading e-commerce name, Flipkart, which will help Walmart expand its presence in India. However, Flipkart’s deal is expected to hurt the bottom line in fiscal 2019, which raises some concerns for the quarter to be reported.
Nonetheless, during its third-quarter release, management stated that it was encouraged about the rosy U.S. economic scenario, and is focused on boosting innovations and leveraging technology. Walmart also was hopeful about the holiday season, given consumers’ continued favorable response to its omnichannel offerings. Considering all factors and solid anticipations for the fourth quarter, the company had raised its U.S. comps and adjusted earnings per share guidance for fiscal 2019, when it reported third-quarter results. Also, Walmart anticipated to achieve U.S. e-commerce sales growth of 40% in fiscal 2019. Considering these factors, we hope Walmart’s upcoming results to boost investors’ confidence in the stock.
What the Zacks Model Unveils
Our proven model shows a beat for Walmartthis earnings season. For this to happen, a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Walmart carries a Zacks Rank #3, which along with an Earnings ESP of +5.55% makes us reasonably confident of an earnings beat. You can see the complete list of today’s Zacks #1 Rank stocks here.
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