Investors nervously await Wal-Mart's earnings
The retailer is set to announce its quarter Thursday morning. Can it overcome a long slide in US sales?
Investors will be keeping a close eye on Wal-Mart's (WMT) quarterly earnings Thursday morning, searching for signs of the company's progress in a shaky economic recovery.
Life hasn't been easy for the nation's largest retailer this year. Same-store sales at U.S. locations have slid for five straight quarters, leading analysts at UBS (UBS) in June to remove Wal-Mart from their "Most Preferred List." On July 29, analysts at Goldman Sachs (GS) downgraded the stock to "neutral" from "buy."
Government data showed in June that food stamp usage has fallen from its 2012 peak. It is unclear how this data set will play out for Wal-Mart in the coming quarters, considering the chain has captured an estimated 18 percent of the SNAP (food stamps program) market.
Also adding to Wal-Mart's woes during the quarter is the fact that its former U.S. president, Bill Simon, said that the country's hiring rebound is not translating to a rise in customer spending at its stores. Simon added that the economy is "not getting any better or worse" for its core customers.
Simon resigned not long after making those comments, and was replaced by Greg Foran, Wal-Mart China's former CEO and someone who has never worked in the U.S. before.
A disappointing track record
The company last reported quarterly results on May 15. The retailer earned $1.10 per share, 5 cents a share less than analysts expected. Revenue of $114.9 billion fell short of expectations by nearly $1.4 billion.
Wal-Mart noted that poor weather in the quarter lowered its profits by 3 cents a share. At the same time, comparable-store sales growth in the United States was flat. Inventory issues arose as inventory growth of 5 percent outpaced the rate the company grew sales by 430 basis points.
Traffic issues were also brought into focus, as traffic fell 1.4 percent in the United States. Wal-Mart guided its second quarter earnings to be in a range of $1.15 to $2.15, which at the time fell short of the consensus estimate of $1.28.
Following Wal-Mart's results, Brian Sozzi of Belus Capital Advisers noted that the company has had problems getting people into U.S. stores in non-holiday periods.
Robert Ohmes of Bank of America (BAC) named Wal-Mart as a "favorite defensive stock" in an industry wide note on Aug. 6. The analyst believes that Wal-Mart's U.S. growth outlook is supported by new opportunities the company has as it focuses on opening small neighborhood locations instead of large supercenters.
"We continue to believe Wal-Mart intends to capitalize on the success of its smaller Neighborhood Market and Express store formats by accelerating its rollout to 300 plus locations as the company pursues a potential $400 billion market opportunity," Ohmes wrote, providing a longer-term buy thesis that may ignore short-term issues plaguing the retailer.
Nevertheless, Ohmes has a "buy" rating with a $90 price target.
Sozzi of Belus Capital reiterated a "sell" rating Tuesday with a $71 price target. Unlike Ohmes, Sozzi believes that Wal-Mart faces structural issues which should concern shareholders.
"We believe Wal-Mart is on the cusp of truly delivering a knockout blow to investors when it reports its second quarter earnings," Sozzi wrote. "Given our observation of an increased number of clearance zones at numerous stores, and rising amounts of excess seasonal goods on markdown as the second quarter moved along, Wal-Mart is at risk of missing second quarter consensus earnings per share forecasts, which are oddly near the upper-end of its $1.15-$1.25 guidance ($1.21)."
Sozzi further said that a third-quarter earnings and sales guidance could be weaker than expected.
"Management likely has a desire to kitchen sink the third quarter and fiscal year earnings guidance ranges, capturing the important back to school and holiday seasons, so it could show some form of operating progress heading into 2015," Sozzi adds.
Bottom line, Sozzi speculates that institutional shareholders could begin fleeing if Wal-Mart continues to underwhelm with its 2014 results.
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