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After two negative guidance revisions, Walmart’s estimates appear to be inflecting positively. The consensus EPS estimates for Q3 reflect a more significant deceleration in sales trends and headwinds from markdowns than our model.
Walmart is the fifth largest holding in the Consumer Staples XLP ETF, as such many analysts must consciously decide whether to be underweight or overweight. We think now is the time to be overweight Walmart.
Walmart’s competitive dynamics have implications for numerous competitors as well as the supply chain. As the largest food retailer, its promotional intensity can set the pace for the industry. As the largest customer for numerous CPG companies, its pricing plans can have an outsized influence on margin trends.
Beyond Walmart’s own profit forecasts and investment prospects our Black Book will focus on the following:
- In-stock levels for food retailers and the implications for price elasticity.
- Is there a change coming for store label substitution?
- Pricing plans – passing on increases or pushing back on the manufacturers.
- Competitive pricing for food retailers.
- Walmart is gaining share in food retail and driving traffic.
- On the technology front, Walmart remains committed to future investments and could be a needed partner in the streaming wars.
- We will continue to add more areas of interest, please stay tuned.
Historically Walmart outperforms in Quad 4 and on an absolute basis has had positive returns as seen in the charts below.
Q2 Review
Walmart reported Q2 EPS of $1.77 vs. consensus expectations of $1.62. Walmart pre-announced Q2 results on July 25 and lowered the EPS outlook for both Q2 and the year. Management cited the strength in consumables was offset by weakness in discretionary categories which had resulted in excess inventories. For Q2 EPS, management’s guidance for YOY growth to be flat to up slightly was revised to down 8-9%. The actual results of $1.77 vs. $1.78E are much closer to the original guidance.
Sales growth of 8.4% exceeded the preliminary estimate of 7.5%, which was raised from 5% at the time of the pre-announcement. Walmart’s U.S. comp store sales increased 6.5% ex. fuel, above expectations. Transactions grew 1% while average ticket increased 5.5%. E-commerce sales grew 12%, accelerating from 1% in Q1. Sam’s Club SSS ex. fuel and tobacco increased 10% due to transaction growth. Same store food sales increased mid-teens. Food units were slightly negative with trends flat exiting the quarter. Management said that households with annual incomes above $100,000 represented three-quarters of the company’s share gains in food. Internationally comps were up double digits in the three largest markets of Mexico, Canada, and China.
Gross margins contracted 132bps and were slightly less than expected due to markdowns and a greater mix of consumables. Management called out higher penetration of private brands, particularly in food categories. At the end of Q2 inventory was up 26% YOY, decelerating 7.5% sequentially. Management noted that 40% of the growth is due to inflation. The company said shipping containers in its supply chain have been cut by half from Q1. Walmart leveraged SG&A expenses by 45bps with sales leverage somewhat offset by higher wages.
Other notables include:
- Membership income grew 9% for Walmart+ as membership count continues to grow.
- Q2 discrete items include a favorable insurance settlement of $173M and a $182M special dividend that were previously disclosed.
- Sam’s Club added more new members in the quarter than any quarter in recent years.
Management’s guidance for the year remains similar to the revision provided on July 25 adjusted for the upside in Q2 results. Management now expects EPS for the year to decrease 9 to 11% YOY, up from an 11 to 13% decrease previously. Revenue is still expected to grow ~4.5% YOY with U.S. comp store sales ex. fuel growth of 3% in the 2H.
