What To Expect From Wal-Mart’s Second-Quarter Earnings

Wal-Mart (NYSE:WMT) is scheduled to report its second-quarter earnings on Thursday, August 16 before the markets open. We expect online grocery to drive some growth for the company, though the accompanying expenses could result in some margin pressure. The retail giant reported solid fiscal first quarter results, as both its earnings per share and revenues came in ahead of market expectations. On a reported basis, the company’s revenue increased 4% year over year (y-o-y) to $123 billion, driven by growth in the domestic market due to its marketplace offerings. However, its diluted earnings per share declined 28% y-o-y, largely due to the company’s e-commerce investments putting pressure on its bottom line. This pressure was in large part due to accounting standards which required the company to report an unrealized loss related to a decline in JD.com’s stock during the quarter, as Wal-Mart holds a significant position in the Chinese e-commerce giant. However, on an adjusted basis, Wal-Mart’s earnings per share grew by 14% y-o-y to $1.14.

Our $94 price estimate for Wal-Mart’s stock is slightly ahead of the current market price. We have created an interactive dashboard on what to expect from Wal-Mart’s fiscal Q2, which outlines our forecasts for the company. You can modify our forecasts to see the impact any changes would have on the company’s earnings and valuation.

Overview Of Performance

Wal-Mart saw its stock gain nearly 50% in 2017, but the stock price has declined more than 10% over the course of 2018 despite strong financial results. This is largely due to a relative slowdown in the company’s e-commerce growth in the fiscal first quarter to 33% y-o-y from 60%+ in the first three quarters of fiscal 2018 (year ending January 2018). However, this e-commerce growth in Q1 accelerated from the 23% seen in Q4. Going forward, we expect the company to continue to post an increase in revenue growth rate in Q2, driven by growth across operating segments. We also expect the GAAP earnings pressure to continue due to investments in technology and a rise in employee wages. We expect the company to post adjusted earnings per share of around $1.20 in the second quarter, compared to $1.08 in Q2 fiscal 2018.

Future Outlook

Walmart announced in May that it would pay $16 billion to acquire a 77% stake in Flipkart, India’s biggest online retail company, at an estimated valuation of $20-22 billion to make further inroads into the fast-growing market. This deal is believed to be the world’s biggest e-commerce deal, as well as the largest for the U.S. retailer. Wal-Mart expects its investment in Flipkart to negatively impact its full-year fiscal 2019 EPS by approximately $0.25 to $0.30 – if the transaction closes in this fiscal year.

We have calculated Wal-Mart’s total revenue in fiscal 2019 by estimating the revenues from the company’s domestic sales, international sales, Sam’s club sales and other income. Further, we have calculated the retailer’s divisional revenues by estimating the number of stores, square footage per store and revenue per square feet in fiscal 2019. We expect Wal-Mart’s fiscal 2019 store count in the U.S. to be over 4800, with an average square footage per store of 147k and revenue per square foot of $466, translating into around $330 billion (+3% y-o-y) in domestic revenues in fiscal 2019. In addition, we also expect approximately 6370 stores in international markets with an average square footage per store of 58k and revenue per square foot of $319, translating into $119 billion (+1% y-o-y) in international revenues in the same period. On similar lines, we expect Sam’s Club revenues to reach $58 billion (-2% y-o-y) in fiscal 2019, with 599 Sam’s Club stores, 134k square footage per store and revenue per square foot of $724. We expect a decline here on the account of the closing of 63 Sam’s Club locations.

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