Updated at 10:55 a.m. EDT
Walmart shares rose in early trading Monday after a Wall Street analyst made a key investment decision ahead of the retail giant’s second-quarter earnings report this week.
Walmart (WMT) which has enjoyed a similar year-to-date rise to shares of the Magnificent 7 tech group, has added more than $120 billion to its market value as it continues to capture an increasing share of spending from price-conscious consumers grappling with stubborn inflation.
Latest updates from online retail giant Amazon (Amazon) and subdued prospects from brand groups such as Procter & Gamble (PG) and names from the consumer goods sector such as PepsiCo (PEP) suggest that consumer headwinds will intensify in the fall months.
Amazon CFO Brian Olsavsky told investors earlier this month that consumers were “watching their spending, buying cheaper products and looking for bargains” in the second quarter, adding: “We’re seeing signs of that continuing into the third quarter.”
However, retail sales have held up well: The Commerce Department put them at a total of $704.3 billion for June, exceeding Wall Street forecasts.
In an environment of persistent inflation, Walmart is beginning to attract higher-income customers with its “low prices every day” model.
Image source: Tim Boyle/Getty Images
Meanwhile, Amazon’s Prime Day sales last month hit a record $14.2 billion in 48 hours, an 11% improvement over the previous year, according to data from Adobe Analytics.
Consumers are limiting their spending
However, given the rising unemployment figures and the deteriorating labor market situation in the coming months, analysts expect consumer spending to decline, which in turn is likely to lead to a general economic slowdown.
But Evercore ISI analyst Greg Melich believes Walmart will “reaffirm its status as a relative safe haven in a volatile consumer environment” when the company reports its second-quarter results on Thursday. He expects the Bentonville, Arkansas-based group to reiterate its full-year sales and profit forecast.
Analysts expect Walmart to report total sales of $168.5 billion in the three months through July, up 4.3 percent from the same period last year. Earnings are expected to rise 6.6 percent to 65 cents per share.
Earlier this spring, Walmart estimated earnings would be at or slightly above the high end of its usual forecast of $2.23 to $2.37 per share, with net sales increasing 3 to 4 percent from the previous year.
Walmart also appears to be gaining market share among higher-income consumers, particularly in the grocery space. This is helping to stabilize the stock as the company’s broader package of initiatives, including its e-commerce strategy, keeps customers in the Walmart ecosystem.
“While management is pleased with the market share gains in general merchandise, it sees additional opportunities to gain market share in the future, supported by improvements in the marketplace and stores,” said Bradley Thomas, an analyst at KeyBanc Capital Markets, after visiting with Walmart executives in Bentonville last month.
Tactical call on Walmart shares
“More specifically, the store remodeling lays the foundation for the company to offer a better assortment in general merchandise (and especially in apparel and home goods),” said Thomas, who rates Walmart “overweight” and has a price target of $82.
Evercore’s Melich expects the group’s quarter to be in line with expectations and is “tactically positive” about the stock ahead of Thursday’s report.
“Risks to this forecast include a potential weakening in demand trends after (quarter-end), which could cause Walmart to adopt a more conservative forecast for (the second half of the year); the risk of continued wage inflation, technology investments and remodeling expenses that could result in higher (selling, general and administrative expenses), increased ocean freight costs and/or competition,” Melich said.
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“If Walmart misses the second quarter and/or lowers its guidance (second half earnings per share), the stock could fall by a mid- to high-single-digit percentage as execution mishaps could challenge its safe-haven status,” Melich said. The analyst reiterated his $74 price target and his “outperform” rating on the group.
Walmart shares last traded 1.6% higher in early Monday trading, changing hands at $69.03, a move that increases their 2024 gain to around 30%.
