Walmart Heads Into Q2 Earnings With Solid Momentum: How to Play WMT?

Walmart has a trailing four-quarter negative surprise of 0.6%, on average. In the last reported quarter, the company delivered an earnings surprise of 1.5%.

What the Zacks Model Predicts for WMT’s Q2 Earnings

As investors prepare for WMT’s quarterly announcement, the question looms regarding an earnings beat or miss. Our proven model predicts an earnings beat for Walmart this time. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat, which is the case here. You can see the complete list of today’s Zacks #1 Rank stocks here.

Walmart has a Zacks Rank #3 and an Earnings ESP of +0.71% at present. You can uncover the best stocks before they’re reported with our Earnings ESP Filter.    

Factors Likely to Aid WMT’s Q2 Results

Walmart’s second-quarter performance is likely to have benefited from continued strength in its value proposition as consumers sought savings amid pressure on household budgets. Management entered the quarter with roughly 7,200 rollbacks and indicated that it would continue leaning into price investments to reinforce customer loyalty and market-share gains. The combination of everyday low prices, broader assortment and convenience is likely to have supported transactions and unit volumes. Management expects second-quarter constant-currency sales growth of 4%-5%.

Continued e-commerce and marketplace momentum is also likely to aid results. Walmart has been improving delivery speeds by leveraging its stores, clubs and fulfillment infrastructure, while broader third-party assortment has helped deepen customer engagement. Supply-chain automation and AI-led inventory and fulfillment improvements may have enhanced productivity and operating leverage.

The company’s evolving profit mix is likely to have remained another positive. Higher-margin advertising, membership and marketplace businesses have become increasingly meaningful contributors to profitability. Sam’s Club’s membership fee increase became effective May 1, potentially providing an incremental benefit during the quarter. Management expects second-quarter constant-currency operating income growth of 7%-10% and indicated that profitability should accelerate from first-quarter levels.

Potential Headwinds to WMT’s Q2 Results

Elevated fuel costs are expected to have remained a notable margin pressure and may have contributed to higher retail-price inflation. Lower-income consumers also appeared increasingly budget-conscious amid pressure on household spending, per the last earnings call. 

Apart from this, management expects the merchandise-mix benefit in the second quarter to be less pronounced than in the prior quarter, which received some support from higher tax refunds. These factors may have partly offset the benefits from Walmart’s solid sales momentum and improving business mix.

WMT Stock Price Performance

Over the past year, Walmart stock has rallied 12.9% compared with the industry’s growth of 11.6% and the Zacks Retail – Wholesale sector’s jump of 3.1%. Meanwhile, WMT underperformed the S&P 500’s 23.7% rise during the same period.

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In the said time frame, Walmart surpassed other retailers such as The Kroger Co. KR, Costco Wholesale Corporation COST and Dollar General Corporation DG. While DG shares have gained 6.4% over the past year, KR and COST have declined 20.4% and 2.8%, respectively.

Walmart’s Valuation Picture

Walmart shares are currently trading at a forward 12-month price-to-earnings (P/E) multiple of 36.98, above the industry average of 33.98 but below the stock’s one-year median of 38.67. The company also commands a sizable premium to peers Kroger and Dollar General, which trade at forward P/E multiples of 10.4 and 15.55, respectively. However, Walmart’s valuation remains below Costco’s multiple of 42.5.

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The premium valuation relative to the industry and several peers suggests that the market is assigning considerable value to Walmart’s scale, defensive characteristics, omnichannel capabilities and expanding higher-margin businesses. At the same time, the multiple leaves less room for execution missteps, making sustained sales and profit growth important for supporting the valuation.

How to Play WMT Stock Now?

Walmart’s resilient traffic trends, e-commerce momentum, expanding higher-margin businesses and improving operating leverage offer a favorable setup ahead of the second-quarter release. The positive Earnings ESP and Zacks Rank #3 also point to increased odds of an earnings beat. However, elevated fuel costs, pressure on lower-income consumers and a premium valuation warrant some caution. Against this backdrop, existing investors may consider holding the stock, while new investors may prefer to await greater clarity on earnings momentum and margin trends.

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This article originally published on Zacks Investment Research (zacks.com).

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