A year ago, the discounter benefited as shoppers flocked to its stores and website to spend stimulus checks, causing same-store sales in the United States to rise 9.3 percent during the three-month period. However, sales began to decline in July 2020, as Walmart’s supercenters had limited hours and some customers chose to shop at local supermarkets instead.
The discounter is juggling a complicated set of variables. Its sales may increase as consumers spend more money on experiences such as dining out and traveling rather than buying food for the home. Its e-commerce gains may fade as customers return to old habits. Rising inflation and capital expenditures may have an impact on the retailer’s profitability.
Nonetheless, many analysts expect the big-box retailer to grow in the coming quarters as it capitalizes on pent-up demand for back-to-school shopping, benefits from a healthy consumer, and reclaims market share in its grocery business. The company also expects growth, predicting that Walmart U.S. and Sam’s Club same-store sales will rise in the low single digits this year, excluding fuel and tobacco.
If Walmart has a strong second-quarter performance, the stock of the big-box retailer may attract more investors’ attention.
As of Friday’s close, shares of the company had risen about 4% this year, trailing other pandemic beneficiaries in the retail industry, such as Target (48%), Kroger (35%), Home Depot (25%), and Dollar General (13%), as well as consumer staples and the S&P 500 in general.
On Monday, Walmart’s stock was trading around $150, bringing its market capitalization to around $423 billion.
Refinitiv polled Wall Street analysts predict adjusted earnings per share of $1.57 on revenue of $137.17 billion. According to a StreetAccount survey of analysts, Walmart U.S. is expected to grow same-store sales by 3.3 percent excluding fuel.
Investors should pay attention to these four key areas as Walmart releases its latest results.
The grocery industry’s sturdiness
Walmart is the country’s largest grocer, which gives it an advantage in driving frequency as customers visit stores to stock their refrigerators. According to financial filings, grocery accounted for nearly 60% of Walmart’s U.S. sales in the previous fiscal year, which ended in January.
During the pandemic, however, the discounter faced stiffer competition because some customers were more concerned with convenience than price and instead shopped at smaller, local supermarkets.
However, the tide appears to be turning as consumers resume more normal shopping habits and look for lower prices. Walmart emphasized in the first quarter that it had regained market share in grocery and saw strong sales in meat and bakery.
According to Placer.ai, an analytics firm that tracks foot traffic based on mobile device location data, Walmart store visits have increased in recent months. That could be good news for grocery stores, which can encourage customers to add extra items to their carts, such as clothes or toys.
Walmart could capture a sizable share of back-to-school spending in a year when that spending is expected to rise. These sales could begin to appear in the second quarter.
Industry observers predict that pent-up demand will lead to increased spending on school supplies, apparel, technology, and other items. According to Mastercard SpendingPulse, back-to-school sales in the United States are expected to increase 6.7 percent from 2019 and 5.5 percent from last year.
Child tax credit payments deposited into families’ bank accounts may also encourage parents to spend more on their children. The monthly payments of $250 or $300, depending on the age of the child, began in July and will continue until December.
Back-to-school merchandise is also a win for Walmart, according to Robby Ohmes, a retail analyst for Bank of America, because it supports general merchandise sales, which are more profitable than selling food.
Walmart, like other retailers, is under pressure from suppliers to raise prices on everything from food to personal care items. Furthermore, it has an aggressive investment plan for this fiscal year, such as adding automated fulfillment centers for online grocery orders to stores — a spending increase that is unlikely to be reversed anytime soon.
According to Simeon Gutman, a retail analyst at Morgan Stanley, these costs could reduce the big-box retailer’s profitability. He believes Walmart will have to decide whether – and how much – of the higher costs to pass on to customers without jeopardizing its reputation for “Everyday Low Prices.”
“That could be a challenge because one concern is that Walmart, in their desire to reinvest in price and gain market share, may not allow prices to rise as much as their competitors,” he said.
However, Walmart’s size may provide the company with more leverage than smaller retailers, according to Krisztina Katai, a retail equity research analyst at Deutsche Bank.
“They’re in a much better position to negotiate with vendors and potentially push back on cost increases they don’t want to accept,” she explained.
The delta variation
For some investors, pandemic-related disruptions appeared to be a thing of the past. Instead, they saw difficult comparisons ahead as Walmart and other big-box players and grocers lapped sales when people spent money on food and entertainment at home rather than juggling other costs like commuting, traveling, or eating out.
However, with another wave of Covid cases and hospitalizations in parts of the United States, the return to a post-Covid world appears to be further away, according to Gutman. He believes the delta variant raises new questions about whether consumer spending will shift, such as toward e-commerce or home cooking rather than experiences.
However, Gutman believes that the delta variant will not have the same impact on shopping as it did last year, because retailers and consumers have grown accustomed to dealing with the pandemic.
“It’s a pothole,” he explained. “This is a setback. It’s most likely not a derailment.”