Walmart Earnings preview- Watching for insight on retail spending

Walmart (WMT) is set to report its Q3 earnings tomorrow before the market opens, with analysts expecting earnings of $0.65 per share on revenue of $168.56 billion. Investors will be closely watching key metrics such as Walmart U.S. comp sales, where Jefferies has raised its estimate to 4.0%, above the consensus of 3.4%, driven by an acceleration in traffic and slight pressure from ticket sales. Another key focus will be Walmart's ability to maintain its EPS guidance, particularly in light of potential headwinds from FX in the international business.

Analysts from Evercore are anticipating an in-line quarter for Walmart, with the company likely to reiterate its full-year sales and EPS outlook. However, risks remain, including the potential for moderating demand trends, ongoing wage inflation, and increased competition. Despite these challenges, Evercore sees Walmart as a relative safe haven in a volatile consumer market, with the stock benefiting from its strong execution and ability to navigate the current environment.

Deutsche Bank is optimistic about Walmart's upcoming results, expecting the company's model to demonstrate resilience amid a slowing consumer backdrop. The firm highlights the contribution of alternative revenue streams, lean inventories, and improving e-commerce as drivers of operating income growth. DBAB also expects management to raise FY guidance to the high-end of the range, though they may strike a cautious tone regarding the back half of the year due to potential challenges such as election noise and general merchandise softness.

Walmart's performance in e-commerce, which now accounts for 16% of its revenue, will also be under scrutiny. The company's ability to maintain momentum in this area, along with its successful execution in emerging segments like digital advertising, will be key to driving future growth. Investors will be looking for any signs that Walmart is effectively leveraging these areas to expand margins and enhance profitability, particularly as the company faces elevated valuation expectations.

Finally, Walmart's management is expected to provide additional color on how the company is expanding its margins, especially in light of the strong performance from Sam's Club and the growing contribution of new businesses like advertising and memberships. The company's ability to sustain this momentum and deliver on its guidance will be critical in determining whether Walmart can continue to outperform in a challenging retail environment.

WMT saw its stock rise 7% after reporting strong Q1 earnings, with a healthy beat on both EPS and revenue. The company issued in-line guidance for Q2 and slightly raised its full-year revenue and adjusted EPS outlook. All three of its operating segments performed well, driven by growth in units sold, transaction counts, and market share gains, particularly in general merchandise. Notably, Walmart emphasized that its sales growth was not solely inflation-driven, with like-for-like sales inflation in the U.S. at just 40 basis points. The Walmart U.S. segment showed strong performance with a 3.8% increase in comp sales, bolstered by a 22% growth in eCommerce and higher engagement across all income cohorts.

Walmart also highlighted strong results in its Sam's Club and International segments. Sam's Club saw a rebound in comp sales, led by food and consumables, while Walmart's International segment posted a 10.7% revenue growth in constant currency, driven by strength in Walmex, China, and Flipkart. Despite ongoing pressure on consumer wallets, with spending shifting more toward non-discretionary categories, Walmart's performance was robust. The company’s ability to attract higher-income shoppers and its focus on offering quality and value through initiatives like the new Better Goods private brand suggest that Walmart is well-positioned for continued success. This positive report has lifted Walmart’s stock above its recent trading range, signaling potential for further gains, and sets a positive tone for Target’s upcoming earnings report.

Walmart trades at a higher P/E multiple, currently around 25x, due to its status as a consumer staple, despite its traditional mid-single-digit EPS growth. The company is expected to achieve 10% EPS growth annually over the next three years, with consensus estimates projecting revenue of $676 billion by January 2025 and $703 billion by January 2026. While Walmart's price-to-sales ratio remains relatively low at 0.75x, its price-to-cash flow and free cash flow are notably high at 14x and 33x, respectively, indicating that the stock isn't cheap.

The key valuation story for Walmart revolves around its margin expansion and new growth ventures, though it remains an expensive stock compared to historical metrics, particularly when viewed against competitors like Costco, which now trades at a higher price-to-revenue ratio.