Can Wal-Mart Continue Its Strong Growth In The Second Half Of The Year?

Wal-Mart (NYSE:WMT) reported strong fiscal second quarter results on Thursday, August 16, 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 $128 billion, driven by growth in the domestic market due to its marketplace offerings. Wal-Mart’s adjusted EPS grew by 19% y-o-y to $1.29. Wal-Mart U.S. delivered a strong top-line performance, with comparable sales of 4.5%, driven by a 2.2% increase in customer traffic in Q2. Overall, e-commerce contributed approximately 100 basis points to the segment’s comparable sales growth in the second quarter. Globally, on a constant currency basis, the company’s e-commerce sales increased 40% in the quarter. In the company’s other segments, Wal-Mart’s international sales grew 4% y-o-y to $29 billion during the quarter, led by strength at Walmex. On the other hand, Sam’s Club revenues declined marginally y-o-y, negatively impacted by tobacco. However, Sam’s Club comparable sales grew 5.0% y-o-y (ex. fuel) in the quarter, led by solid traffic.

Our $94 price estimate for Wal-Mart’s stock is slightly below the current market price. We have created an interactive dashboard on what to expect from Wal-Mart’s fiscal Q3 and fiscal 2019, 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.

Wal-Mart saw its stock gain nearly 50% in 2017, but it had declined more than 10% over the course of 2018 (prior to the Q2 earnings release) despite strong financial results. This was 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, the retailer stock has now rallied by around 11% after posting strong fiscal Q2 results. Going forward, we expect the company to continue to post an increase in revenue growth rate in Q3, 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 forecast the company to post adjusted earnings per share of around $1.05 in the third quarter, compared to $1.00 in Q3 fiscal 2018. Also, we expect online grocery to drive some growth for the company, though the accompanying expenses could result in margin pressure.

Fiscal 2019 Outlook

Wal-Mart has lifted its full-year adjusted EPS guidance to $4.90 to $5.05 from its previous range of $4.75 to $5.00. The retail giant also expects net sales growth of ~2%, compared to a prior range of 1.5% to 2.0%. In addition, the company expects the comparable sale of around 3%, which compares to the previous guidance of at least +2%. The retailer’s management is aggressively rolling out grocery pickup and delivery in the U.S. and expanding omnichannel initiatives in Mexico and China.

We expect Wal-Mart to generate around $511 billion in revenues in fiscal 2019, and earnings of almost $14 billion. Of the total expected revenues in fiscal 2019, we estimate $330 billion in the Wal-Mart U.S. business, almost $120 billion for the Wal-Mart International business, and nearly $58 billion for the Sam’s Club business. Further, we have calculated the retailer’s divisional revenues by estimating the number of stores, square footage per store and revenue per square foot 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 $330 billion (+3% y-o-y) in domestic revenues in fiscal 2019. In addition, we also expect close to 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 $724 of revenue per square foot. We expect a decline here on the account of the closing of 63 Sam’s Club locations.

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