Walmart’s Fourth Quarter Earnings: Key Items To Consider
Contributor since 2012 / 9859 Followers
Summary:
- Walmart is releasing the company’s Q4 FY 2023 financial results next Tuesday, and I predict that WMT will deliver an earnings beat.
- I considered industry data, management commentary, and analysts’ expectations as part of my analysis, before I came to the conclusion that above-expectations fourth quarter earnings for WMT is highly probable.
- My Buy rating for Walmart stays unchanged; higher than expected Q4 earnings could help to re-rate WMT’s shares in the short term.
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Elevator Pitch
I continue to have a Buy rating assigned to Walmart’s (NYSE:WMT) stock.
My July 8, 2022 write-up for Walmart was focused on the pullback in the company’s share price post-Q1 FY 2023 (YE January 31) earnings release. I turn my attention to the preview of WMT’s upcoming quarterly financial results in the current update.
I make no changes to my existing Buy rating for Walmart, as I see WMT registering better than expected Q4 earnings next week. Walmart has probably benefited from lower expenses associated with product cost and shipping in the recent quarter, and the company could also have gained market share at the expense of its competitors which are charging relatively higher prices.
Walmart’s Q4 FY 2023 Earnings Announcement Date
Walmart plans to reveal the company’s earnings for the fourth quarter of fiscal 2023 and conduct its results briefing on Tuesday, February 21, 2023 before the market opens.
In the subsequent section of the article, I will outline Wall Street’s expectations of WMT’s Q4 FY 2023 financial performance.
Analysts Expect That Q4 FY 2023 Was A Tough Quarter For WMT
The consensus financial projections for Walmart taken from S&P Capital IQ suggest that the company’s most recent quarterly financial results could be disappointing as per Wall Street analysts’ estimates.
The sell-side analysts predict that WMT’s revenue growth for Q4 FY 2023 will be slower as compared to prior quarters. Walmart’s top line rose by +8.2% YoY and +8.8% YoY for the second and third quarters of fiscal 2023, respectively. But the sell-side forecasts that WMT’s YoY top line expansion will moderate to +4.5% for Q4 FY 2023.
Wall Street estimates that Walmart’s non-GAAP adjusted earnings per share (or EPS) could decline by -1.0% YoY to $1.52 in the final quarter of the prior fiscal year, which won’t be as good as WMT’s bottom line performance in earlier quarters. The actual normalized EPS for Walmart increased by +3.4% and +10.1% in Q3 FY 2023 and Q4 FY 2022, respectively in YoY terms.
Separately, while a significant number of analysts have raised their respective Q4 FY 2023 bottom line projections for WMT in recent months, the actual adjustment in quantitative terms isn’t very significant. In the past three months, 21 of the 41 Wall Street analysts covering WMT’s shares increased their fourth quarter normalized EPS forecasts for Walmart. In this time period, the consensus Q4 FY 2023 bottom line estimate for WMT was only increased slightly by +0.9%.
I share my views on the likelihood of a Q4 FY 2023 earnings beat for Walmart in the next section.
My Bet Is On A Positive Earnings Surprise For Walmart
My take is that there is a reasonably good chance of WMT reporting higher than expected Q4 FY 2023 earnings in the following week. Walmart continues to be a low price leader, and cost pressures for the company should have eased to a large extent.
At the Morgan Stanley (MS) Global Consumer & Retail Conference on December 8, 2022, Walmart’s CEO Doug McMillon emphasized that the company is “managing price gaps as we go.” The CEO’s views on WMT’s sustained price leadership and its ability to maintain “price gaps” with its rivals are validated by recent industry data.
JPMorgan (JPM) recently published a research report (not publicly available) titled “US Food Retail – Apples-to- Apples Online Price Survey” on February 6, 2023. In the JPM report, it was highlighted that Walmart’s “price advantages versus Albertsons Companies (ACI), Kroger (KR), Sprouts Farmers Market (SFM), and Target Corporation (TGT) expanded” QoQ in the time period between November 2022 and February 2023. As an example, the price difference for the same group of selected products sold at KR (more expensive) and WMT (cheaper) widened from +5% in November last year to +10% in February this year as per JPM’s pricing research.
Also, WMT could have possibly benefited from lower costs relating to transportation and product sourcing in the recent quarter. An October 17, 2022 The Washington Post news article noted that the “ocean freight rate” for the “China/East Asia – U.S. West Coast” route dropped substantially from its September 2021 high of $20,586 to just $2,720 in mid-October last year. Separately, Walmart previously mentioned at its Q3 FY 2023 earnings call that the company is actively “working with vendors to reduce product cost” and observed that “some (of WMT’s) suppliers are more aggressive than others” in driving down “product cost.”
In other words, I think that there is a high probability that Walmart’s actual fourth quarter results, which will be released next Tuesday morning, can surprise on the upside.
Price Target For WMT
I arrive at a target price of $179.50 for Walmart by applying a forward P/E multiple of 25 times to the sell-side’s consensus FY 2025 normalized EPS of $7.18. This translates into a +23% upside for WMT’s shares as compared to its closing stock price of $145.49 as of February 14, 2023.
Walmart’s mean three year forward P/E ratio is 23.3 times as per S&P Capital IQ valuation data. Considering the uncertain economic environment, retailers with a focus on value like Walmart (as evidenced by pricing comparison data cited in the preceding section) should continue to be favored by consumers. As such, I deem WMT to be deserving of a valuation premium, which is why I have applied a 25 times (slightly higher than the three-year average) P/E multiple in computing the price target for Walmart.
Closing Thoughts
I retain a Buy rating for WMT. Walmart’s share price has the potential to go higher based on my $179.50 target price for the stock. A near-term catalyst for the stock could be a potential EPS beat in the following week.
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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