Will Higher Health Costs Mar Wal-Mart (WMT) Q4 Earnings? - Analyst Blog

Wal-Mart Stores Inc. ( WMT ) is set to report fourth quarter fiscal 2015 results, before the opening bell on Feb 19. Last quarter, this retail giant posted positive earnings surprise of 2.68%. Let's see how things are shaping up prior to the announcement.

Factors to Consider

After delivering six weak quarters in a row, Wal-Mart's third quarter fiscal 2015 earnings came in line with estimates, while revenues were better than expected. Positive comps at Wal-Mart U.S., improved performances in Sam's Club and the international business and a lower-than-anticipated tax rate contributed to earnings growth.

The company continues to expect improved comps at both Wal-Mart U.S. and Sam's Club in the fourth quarter of fiscal 2015. Wal-Mart expects U.S. comp sales to lie between flat and 1% in the fourth quarter ending Jan 30, as against a decline of 0.4% last year. Sam's Club comp sales, without the impact of fuel sales, are expected to be between flat and 2% compared to a decline of 0.1% last year. The company believes that consumer spending may improve following the fall in gas prices and a drop in U.S. unemployment in the upcoming quarter.

Wal-Mart expects fourth quarter adjusted earnings to range between $1.46 and $1.56 per share. The Zacks Consensus Estimate of $1.54 per share lies toward the higher end of the guidance range.

However, the fiscal 2015 earnings are expected to be negatively impacted by higher investments in e-commerce and higher U.S. health care costs, apart from incremental investments in Sam's Club and fluctuation in tax rates, as announced during the third quarter fiscal 2015 conference call. The company had also narrowed its earnings guidance for fiscal 2015. The Zacks Consensus Estimate of $4.99 per share lies within the guidance range.

Notably, in mid-October, the company also slashed its fiscal 2015 sales outlook due to a tough economy. Wal-Mart expects annual sales to grow in the range of 2% to 3% for fiscal 2015, down from its earlier guidance of sales growth on the lower end of the 3% to 5% range. (Read: Wal-Mart Cuts Sales View, Investing More in E-Commerce ).

Earnings Whispers?

Our proven model does not conclusively show that Wal-Mart is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank of #1, 2 or 3 for this to happen. That is not the case here as you will see below.

Zacks ESP: The Earnings ESP for Wal-Mart is 0.00% as both the Most Accurate estimate and the Zacks Consensus Estimate stand at $1.54 per share.

Zacks Rank #3 (Hold): Wal-Mart's Zacks Rank #3 when combined with a 0.00% ESP makes surprise prediction difficult.

We caution against stocks with Zacks Rank #4 and #5 (Sell rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

Other Stocks to Consider

Stocks in the retail sectors that have a positive earnings ESP and a favorable Zacks Rank and are therefore worth considering include:

Kohl's Corp. ( KSS ) with an Earnings ESP of +0.56% and a Zacks Rank #2 (Buy).

The Kroger Co. ( KR ) with an Earnings ESP of +4.49% and a Zacks Rank #2.

Macy's Inc. ( M ) with an Earnings ESP of +0.41% and a Zacks Rank #3.

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KOHLS CORP (KSS): Free Stock Analysis Report

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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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