While we are at the fag end of the third-quarter earnings season, this week we have reports from several retail companies including Walmart. The stock has sagged this year and has underperformed the markets by a wide margin. What’s the forecast for the stock and should you buy it ahead of the earnings report?
Apart from Walmart, Home Depot, Target, Lowe’s, Macy’s, and Kohl’s are the other leading retail companies that report this week. The earnings of US retail companies attract a lot of attention as they provide insights into the spending behavior of US consumers.
Supply chain issues
The retail industry is grappling with supply chain issues. There has been a shortage of several goods which could hurt retail companies. Notably, Apple lost $6 billion in revenues in the September quarter as supply chain issues took a toll on its production. In the U.S. there have been intermittent reports of shortages of several goods like toiler papers, chicken wings, and diapers. Even some meat products and some turkey sizes have been in short supply.
There has been a perfect storm in the global supply chain. Demand has picked up, especially in the US, while supply hasn’t kept pace. Also, since factories were closed for a long period last year, there has been a lot of inventory drawdown. As a result, companies have been looking at inventory restocking further leading to increased demand. Then we have the localized spreads of coronavirus in parts of Asia, especially in Vietnam and Malaysia. Both these countries are quite important for global supply chains.
The upcoming earnings of retail companies would offer insights into the supply chain issues. Markets would also look at the guidance to get a sense of consumer demand in the US. Since the US economy is largely driven by domestic consumption, the earnings report of retail companies is all the more important.
Walmart earnings estimates
Coming back to Walmart, analysts polled by TIKR expect the company to post revenues of $134.2 billion in the quarter—a year-over-year rise of 0.4%. If analysts’ estimates are correct then this would be the slowest topline growth for Walmart since the second quarter of its fiscal year 2017. Meanwhile, Walmart had cautioned about a growth slowdown at the beginning of the year only. However, the core sales are expected to rise in the low single digits this year even as Walmart expects revenues to fall in the fiscal year due to divestitures.
Walmart’s adjusted EPS in the quarter is expected to rise 4.1% and reach $1.29. For the full year, the company expects the profits to be lower as it increases investments in online capabilities. The company has also increased wages which will take a toll on the profitability.
Analysts are getting bullish
Meanwhile, after a dismal stock price performance in 2021, Wall Street analysts have been turning bullish on Walmart. Last week, Jefferies maintained its buy rating on the stock. “We expect a Q3 beat & are biased to upside based on alt data and opex mgmt. We are slightly above/below Street on Q4 comp/EPS and see upside potential based on topline momentum and ability to manage supply chain/inflation & opex, which could lead to a favorable outlook,” it said in its note.
Morgan Stanley also reiterated its overweight rating on the stock. It said, “Latest AlphaWise data confirms summer inflection to ~14m members (up from ~10-11m earlier in ’21), representing ~11% US household penetration. Still no ‘killer’ feature to the program beyond free grocery delivery, but perks are adding up and could be driving membership.”
Walmart stock price forecast
Overall, Wall Street analysts have a bullish forecast for Walmart stock. It has a median price target of $170 which is a premium of 17% over current prices. The stock’s highest price target is $196 which is a premium of 32.6% over current prices
Of the 35 analysts that are covering the stock, 27 rate it a buy or higher, while eight rate it a hold. None of the analysts has a sell rating on the stock.
Walmart stock valuation
Walmart stock trades at an NTM (next-12 months) PE multiple of 23.2x. While the valuations are higher than the ten-year average, they should be seen in context. The company is investing aggressively in e-commerce capabilities which might pressurize short-term earnings. However, over the long-term, it would support higher multiples and also lead to a sustainable increase in revenues and profitability.
As the company’s CEO Doug McMillion said during the company’s fiscal fourth-quarter 2021 earnings call “This is a time to be even more aggressive because of the opportunity we see in front of us.” He added, “The strategy, team and capabilities are in place. We have momentum with customers, and our financial position is strong.”
How to invest in Walmart stock
An alternative approach to investing in retail companies could be to invest in ETFs that invest in retail stocks.
Through a retail ETF, you can diversify your risks across many companies instead of just investing in a few companies. While this may mean that you might miss out on “home runs” you would also not end up owning the worst-performing stocks in your portfolio. The SPDR S&P Retail ETF (XRT) gives you diversified exposure to the sector. The ETF is up over 61% this year and is outperforming the markets.
By investing in an ETF, one gets returns that are linked to the underlying index after accounting for the fees and other transaction costs. There is also a guide on how to trade in ETFs.