- Reports Q2 2019 results on Thursday, Aug. 15, before the open
- Revenue expectation: $130.18 billion
- EPS expectation: $1.22
The bar is set quite high for the world’s largest retailer to impress investors when it releases its latest quarterly earnings tomorrow. After consistently beating analyst expectations for many years now, it seems Walmart (NYSE:WMT) won't be able to please investors with anything but the extraordinary.
In its first-quarter, Walmart reported that comparable sales at its U.S. businesses rose 3.4% from a year earlier, its strongest performance on that metric for the period in nine years, helped by increasing market share and growth in online sales, even as competitors struggled.
Investors will once again be closely monitoring these two performance indicators tomorrow—same-store sales and online expansion. Their performance explains how successfully Walmart is competing with online behemoth Amazon.com (NASDAQ:AMZN) and will illustrate as well how the Bentonville, AR-based retailer's massive brick-and-mortar presence helps.
The good news is that there is little reason for Walmart investors to worry. Over multiple previous quarters, Walmart has proven that its huge brick-and-mortar presence gives it an advantage no other online competitor can match.
During that period, Walmart has also significantly cut spending on new store construction, in favor of growing its online presence, lowering prices and adding more services in physical stores such as online grocery pickup. To compete with Amazon’s one-day delivery feature, the retailer has started offering free, nationwide one-day shipping on thousands of household goods. It expects to be able to reach 40% of U.S. households with grocery delivery by the end of this year.
The company is quickly expanding its click-and-collect services. The option is currently in 2,450 U.S. stores after adding about 1,000 grocery pickup locations just last year. That’s a serious challenge to Amazon, which offers pickup from Whole Foods in 22 cities.
Strong Consumer Sentiment Also Helping
Even as its online strategy has succeeded in fueling growth, enhanced consumer sentiment is also helping keep customer traffic strong. Gains last quarter on this metric reflected both an increase in traffic as well as shoppers spending more per transaction. As well, there are signs that this trend will persist—at least for the remainder of this year.
Consumer sentiment in the U.S. held steady in July, near historically elevated levels. At the same time expectations improved in the later part of the month as a strong labor market helped to offset worries about slower global growth and trade tensions, according to Bloomberg, citing the University of Michigan's sentiment index.
Aside from its traditional strength in retail, Walmart is also pursuing other growth opportunities to diversify its revenue base. For example, it's building a digital-advertising business that uses data from both store purchases and visits to its website to help brands target a specific audience.
One danger to this promising outlook, which has started to weigh on its share price, $107is the lingering U.S.-China trade war. Ongoing tensions might force the retailer to increase prices on items it imports from China. These concerns have sparked a sell-off in Walmart shares, which are trading at $107.43 as of yesterday's close. The stock has slipped more than 6% over the past one month.
Bottom Line
After a remarkable rally since its December low, Walmart shares may look expensive. That concern, in our view, ignores the fact the retailer isn’t the same company it was five years ago. With its e-commerce momentum and strong core brick-and-mortar operations, we believe the stock has more room to run. In our view, any post earnings weakness should be seen as a buying opportunity.