Walmart Earnings Preview: It’s A Margin Story Now

Summary:

• The stock has traded up again to $170 per share, right where it was trading in mid-November ’23 when the grocery giant reported it’s Q3 ’24 results.
• Last quarter, Walmart reported revenue growth of 5%, operating income growth that was flat YoY, and EPS growth of 2% YoY.
• The EPS upside surprise for fiscal Q3 ’24 was just 1%, the lowest upside surprise for Walmart of the last 6 quarters.

With the stock and bond markets closed Monday, February 19, 2024, for President’s Day, when the market opens on Tuesday morning, February 20th, 2024, Walmart (NYSE:WMT) will have already reported their fiscal Q4 ’24 financial results, before the opening bell that morning.

The stock has traded up again to $170 per share, right where it was trading in mid-November ’23 when the grocery giant reported its Q3 ’24 results, missing on gross margin and reporting overall disappointing results, sending the stock down to $155 post-release.

Tuesday morning, Feb 20, the Street is expecting Walmart to report the following for fiscal Q4 ’24:

• Revenue: $170.2 billion for YoY growth of 6%
• Op income: $6.761 billion for YoY growth of 12%
• EPS: $1.65 for YoY growth of 8%

Last quarter – the disappointing quarter – Walmart reported revenue growth of 5%, operating income growth that was flat YoY, and EPS growth of 2% YoY.

There was a one-time litigation charge in fiscal Q3 ’24 that wasn’t explained well even in the conference, so I never did get a handle on how that charge arose.

The EPS upside surprise for fiscal Q3 ’24 was just 1%, the lowest upside surprise for Walmart in the last 6 quarters. (WMT has a history of guiding cautiously and beating the estimates.)

Current fiscal ’25 estimates: (runs from Feb 1 ’24 to Jan 31 ’25):

• EPS growth: 9% expected YoY
• Rev growth: 3% expected YoY
• Operating income: 11% expected YoY

Walmart is an AI/margin story:

In the last few Walmart updates written on this blog, (Q3 here and here), Q2 ’24 here and here, and since WMT’s announcement in April of calendar ’23 that management was shifting towards productivity enhancement and lowering expenses all through the supply chain, even automating most of it where possible, that AI and AI enhancement was expected to drive margin improvement at Walmart.

It’s still early in the game, but the juggernaut that is Walmart could expand operating margins by at least 100 bps in my opinion, (and that may be conservative, after management went to sleep after 2010 and let Amazon (AMZN) pick off the retail giant in numerous categories, which pushed operating margins lower.

Although I’ve written this before (both on this blog and over on www.seekingalpha.com), here’s a history of Walmart’s operating margin (averaged over 4 quarters) by calendar year:

• Fiscal 2024 (YTD): 4.15%
• FY ’23: 4.02%
• FY ’22: 4.08%
• FY ’21: 4.04%
• FY ’20: 4.08%
• FY ’19: 4.26%
• FY ’18: 4.65%
• FY ’17: 4.68%
• FY ’16: 5.00%
• FY ’15: 5.58%
• FY ’14: 5.65%
• FY ’13: 5.90%
• FY ’12: 5.91%
• FY ’11: 6.03%

(Source: Internal valuation spreadsheet)

Walmart started getting squeezed after the US economy exited the 2008 meltdown, and as Amazon ascended into general retail and apparel, but they did okay from fiscal 2015 to fiscal ’19, and then Covid and the pandemic really sat on the operating margin, probably due to the logistics mess that impacted many US global giants that imported goods from China and the Far East.

When you look at the above chronology, fiscal ’24 (depending on what Walmart reports Tuesday morning) could be the first year in the last 14 where the operating margin actually increased YoY.

Valuation: At $170 per share, Walmart is trading with a low 20x multiple and expecting to grow EPS 9% average from fiscal ’25 to ’27. Are sell-side analysts starting to boost EPS estimates from supply chain automation and AI savings? It’s still hard to tell.

WMT is trading at about 0.70x revenue (as it always has).

For readers who absorbed the Coca-Cola earnings preview this week, where the issue of KO’s earnings quality was raised, Walmart’s earnings quality is far better, when comparing net income to cash flow and free cash flow:

Click on the above spreadsheet, and note how even Walmart’s free cash flow exceeds net income for more than half the periods covered.

Summary/conclusion: Walmart continues to gain share in grocery which – depending on the analyst you read – is anywhere from 52% to 72% of Walmart’s total revenue. That’s a lot of grocery with $667 billion in revenue in fiscal ’25.

Walmart is exiting the Covid-related period from ’22 where overordering caused a back-up in inventory and “corporate constipation” on Walmart’s part and as was written on this blog, for a well-oiled machine like Walmart, where inventory has to be merchandised flawlessly through the system – from supplier to customer – that period of inventory drag is now over.

Walmart is thought to be a “secular” low single-digit revenue grower, which means that any meaningful operating income and EPS growth for the retail grocery giant, is going to likely come from the middle of the income statement or store efficiency, labor, and supply chain savings.

My own estimation is eventually shareholders could see 100 bps of operating margin improvement, but that may be too conservative.

I wouldn’t expect to see a repeat of Walmart’s Q3 ’24 issues with gross margin and litigation charges, but that can’t be known until the Q4 ’24 financial release is seen on Tuesday morning, February 20th.

Clients have a 1% position in WMT stock, with the intent (at present) to add to the position over time.

None of this is advice or a recommendation. Past performance is no guarantee or suggestion of future results. Investing can involve a loss of principal, even for short-term periods.

All EPS and revenue data is sourced from LSEG. Readers should gauge their own comfort with portfolio volatility and adjust accordingly.

Thanks for reading.

Original Post

Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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