3 Factors You Must Note Ahead of Walmart (WMT) Q2 Earnings

Walmart Inc.WMT is in focus as this world's largest retailer is queued for second-quarter fiscal 2019 earnings release on Aug 16. The company is poised to gain from strong e-commerce initiatives, particularly expansion of online grocery delivery. Bold strides in the e-commerce realm along with efforts to drive brick-and-mortar sales should help this supermarket biggie maintain its sturdy U.S. comparable store sales (comps) trend, though we remain somewhat cautious about the company's strained margins.

Online Grocery & Other E-Commerce Moves Bode Well

Walmart is trying all means to evolve with the changing consumer environment to compete with brick-and-mortar rivals including the e-commerce king Amazon AMZN . In this regard, the company has been taking several e-commerce initiatives including buyouts, alliances, and improved delivery and payment systems. The acquisitions of, ShoeBuy, Moosejaw, Bonobos and ModCloth are major drivers in this regard. Walmart's deals with Rakuten, and Lord and Taylor are also likely to sharpen its online edge. Further, the company's latest Walmart2World money transfer service along with its Walmart Pay mobile payment system and Mobile Express Returns program highlights its focus on accelerating online business and making shopping convenient.

Walmart is also making aggressive efforts to expand in the booming online grocery space, which was a major contributor to its e-commerce sales in the first quarter. This is evident from the company's deals with Postmates and DoorDash, and its acquisition of last-mile delivery service Parcel. In fact, behemoths like Kroger KR and Target TGT are also stepping up their game to expand in the online grocery space. Coming back to Walmart, these endeavors helped the company's U.S. e-commerce sales to soar 33% in the first quarter of fiscal 2019, much better than a 23% rise reported in the fourth quarter of fiscal 2018. First-quarter e-commerce sales improved on the back of strength across and online grocery, keeping management encouraged about achieving 40% growth in fiscal 2019.

Store Sales & International Business Efforts Solid

While expansion in the e-commerce space is a major success mantra, Walmart also remains committed toward enhancing its brick-and-mortar business. The company has been undertaking several efforts to enhance merchandise assortments. Walmart is also on track with store remodeling in an attempt to upgrade it with advanced in-store and digital innovations. Such trends along with a compelling pricing strategy continued driving the company in first-quarter fiscal 2019, wherein both earnings and revenues improved year over year and beat the Zacks Consensus Estimate. Notably, this marked Walmart's 15th consecutive quarter of positive U.S. comps growth. These factors keep us encouraged about the quarter to be reported, which is also likely to reap the benefits of back-to-school selling season. Incidentally, Walmart's robust strategies for the back-to-school season position the company well to lock horns with Amazon.

The Zacks Consensus Estimate for second-quarter U.S. comps growth (excluding fuel) is pegged at an increase of 2.3% compared with 1.8% recorded in the same period last year. Notably, Walmart U.S. forms the company's largest revenue unit. The consensus mark for overall sales stands at $125.7 billion, reflecting growth of nearly 1.9% from the year-ago period.

We also expect Walmart to gain from its steps to improve international business. To this end, the company is making continued efforts to shift focus from underperforming areas to profitable regions like India and China. This is clear from its decision to merge its soft U.K. grocery unit Asda with Sainsbury JSAIY and the deal to sell 80% of its stake in the underperforming Brazilian business. The company also clinched a contract to buy 77% stake in India's leading e-commerce name, Flipkart. Though the Flipkart deal is expected to hurt Walmart's bottom line in the near term, it is likely to bolster e-commerce sales over the long run.

Strained Margins a Concern

Unfortunately, costs associated with investments in e-commerce expansion and technological advancements, the mix impact from growing e-commerce operations and Walmart's compelling pricing strategy have been weighing on its margins. Evidently, these factors caused the company's gross margin to contract 11 bps, 29 bps and 61 bps in the second, third and fourth quarters of fiscal 2018, respectively. In first-quarter fiscal 2019, gross margin shrank 15 bps, largely due to price investments in various markets and increased transportation costs. Also, the operating margin contracted 200 bps in the first quarter as costs associated with e-commerce investments among others led to a rise in operating expenses.

Management earlier projected margins to remain pressurized in fiscal 2019, which raises concerns for the second quarter as well. In fact, strained margins and short-term impacts from the Flipkart-deal have caused the company's shares to decline 9.1% in the past six months, wider than the industry 's drop of 6.4%. Nevertheless, we expect the supermarket giant's sales-driving efforts to help offset these hurdles. Well, the Zacks Consensus Estimate for earnings for the impending quarter has remained stable at 1.21 in the past 30 days, up from $1.08 reported in the year-ago period.

Markedly, Walmart delivered a positive earnings surprise of 1.8% in the last reported quarter, and outperformed the Zacks Consensus Estimate by an average of 0.9% in the trailing four quarters. That said, let's see what the Zacks Model indicates for the upcoming announcement.

Walmart Inc. Price and EPS Surprise

Walmart Inc. Price and EPS Surprise | Walmart Inc. Quote

What's the Probability for Walmart to Beat on Earnings?

Our proven model doesn't show that Walmart is likely to beat bottom-line estimates this quarter. For this to happen, a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .

Walmart's Zacks Rank #4 (Sell) combined with an Earnings ESP of -0.68% makes us less confident of a surprise.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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