It has been about a month since the last earnings report for Walmart (WMT). Shares have added about 7.7% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Walmart due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
Walmart’s Q1 Earnings Top, Revenues Miss Estimates
Walmart reported first-quarter fiscal 2020 results. Adjusted earnings came in at $1.13 per share, way ahead of the Zacks Consensus Estimate of $1.02. However, earnings dropped about 0.9% year over year. This can be attributed to lower operating income and increased net interest expenses related to the Flipkart deal. Including one-time items, Walmart reported earnings of $1.33 per share, which surged from 72 cents reported in the year-ago quarter.
Total revenues advanced 1% to $123.9 billion that fell short of the Zacks Consensus Estimate of $125.2 billion. The year-over-year upside was largely driven by strength in the U.S. business. On a currency-neutral basis, total revenues grew 2.5% to $125.8 billion.
Consolidated gross profit margin contracted 27 bps to 23.8% on account of mix effects in the International segment and impact from Flipkart’s addition. Moreover, gross margin in Walmart U.S. was somewhat hurt by high transport costs and constant price investments, which were more than offset by better merchandise mix.
Consolidated operating income fell 4.1% to $4.9 billion. On a constant-currency (cc) basis, operating income declined nearly 3% to $5 billion. Results were hurt by Flipkart’s addition.
Walmart U.S.: The segment recorded net sales growth of 3.3% to $80.3 billion in the quarter. U.S. comps, excluding fuel, improved 3.4% backed by a 1.1% rise in transactions and 2.3% in ticket.
Further, e-commerce sales drove comps by 140 bps. E-commerce sales surged 37% on the back of strength in online grocery, and solid sales in the Home and Fashion categories on Walmart.com. Operating income at the segment increased 5.5% to $4.1 billion.
Walmart International: Segment net sales slipped 4.9% to $28.8 billion. On a currency-neutral basis, net sales inched up 1.2% to $30.6 billion, with three out of the four largest markets registering positive comps. Operating income at this segment fell 41.7% to $0.7 billion. On a currency-neutral basis, operating income slumped 37.5% to $0.8 billion.
Sam’s Club: The segment, which comprises membership warehouse clubs, witnessed its net sales rise 1.5% to $13.8 billion. Sam’s Club comps, excluding fuel, rose a marginal 0.3%. Lower tobacco dented comps by nearly 270 bps. While transactions increased 4.7%, ticket was down 4.4%. E-commerce fueled comps by nearly 140 bps. Segment operating income came in at $0.5 billion, up 38.8% year over year.
Other Financial Updates
In the first quarter of fiscal 2020, Walmart generated operating cash flow of $3.6 billion and incurred capital expenditures of $2.2 billion, resulting in free cash flow of $1.4 billion. The company allocated $1.5 billion toward dividends and made share buybacks worth $2.1 billion during the quarter.
Recent Developments & View
Walmart continues to focus on boosting innovation and leveraging technology to drive growth. Management stated that it is on track to achieve full-year targets.
Per the previous guidance, the company anticipates consolidated net sales growth of at least 3% in fiscal 2020, including benefits from Flipkart, adverse impacts from Walmart Brazil’s deconsolidation and planned tobacco sales cut downs at Sam’s Club.
Further, management earlier projected Walmart U.S. e-commerce net sales growth of 35% year over year and Walmart International net sales increase of 5% at cc. U.S. comps are expected to advance 2.5-3% (excluding fuel). Comps at Sam’s Club are likely to grow roughly 1%, excluding fuel, and nearly 3%, excluding tobacco fuel.
Management also forecasted consolidated operating income to fall low-single digits, including Flipkart, and rise low-single digits, excluding Flipkart. Finally, earnings are envisioned to decline at a low-single-digit rate year over year, while the same is expected to increase in a low to mid single-digit rate, excluding Flipkart.
For the second quarter of fiscal 2020, the company anticipates sales to be hurt by tough year-over-year comparisons stemming from favorable weather conditions last year. Further, currency is likely to be a drag on sales, to the tune of nearly $1 billion.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates.
At this time, Walmart has an average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. Notably, Walmart has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.
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