What to Know Before Thursday’s Walmart Earnings Report (WMT, AMZN, TGT)

Back in November when Wal-Mart Stores, Inc. (NYSE:WMT) posted its third-quarter earnings figures, most investors were pleasantly surprised. After all, the past six or so Walmart earnings broadly showed a deteriorating top and bottom line.

Walmart, WMT stockAs of Q3, though, the profit of $1.15 per share of WMT stock not only topped estimates by 3 cents, but was stronger than the year-ago bottom line for the first time in a long time. Revenue finally grew too, by 2.9%.

Was it the initial evidence that the turnaround efforts were finally getting traction? More important, was it a sign that WMT stock was worth owning again?

Maybe. But we won’t know for sure until Thursday, when Walmart earnings for the fourth quarter are announced.

Walmart Earnings Outlook

If the analysts are collectively right, Walmart earned $1.54 per share last quarter on $132.3 billion in sales. That’s actually 4% less than the profit of $1.60 per share that WMT reported in the fourth quarter of fiscal 2014 (mostly calendar 2013), though the projected top line is 2% higher than the $129.71 billion the company reported for the same quarter a year earlier.

Yes, that’s a sizable step back for Walmart, and a bit of a surprising lull considering Q3’s surprising earnings growth and the decent sales growth outlook.

What gives?

The message isn’t as mixed as one might think — it’s entirely possible the Walmart earnings report truly could show the company is doing less with more, as the margins on its successful growth efforts are increasingly thinning. In fact, the company’s gross and net margins have already been contracting for about three years, and are projected to continue shrinking for the foreseeable future.

All the same, the low expectations for the fourth quarter in light of Q3’s respectable beat may be a setup for another impressive earnings beat come Thursday.

Food for Thought

Though the end goal for any investment in WMT stock lies in the numbers, those numbers are ultimately produced by the initiatives and strategies the retailer adopts. To that end, there are three key issues would-be WMT shareholders might want to get a grip on before trusting that the company will be able to meet analyst expectations in 2015.

  • E-Commerce: While Walmart has been a habitual laggard in the online retailing arena for years, largely ceding to Amazon.com, Inc. (NASDAQ:AMZN), within the last year, WMT has finally gotten serious about e-commerce. More important, it has gotten real traction within the Internet shopping market. While this is encouraging, it should also be recognized that internet sales tend to be low margin sales. The company has to compete with uber-cheap Amazon in terms of price, and frequently, in terms of shipping costs. Walmart needs scale, top technology, and cleverness to make e-commerce a highly fruitful (read “worth doing”) venture.
  • Groceries: Not that Walmart hasn’t been in the grocery business for a while, but it has only gotten serious about it — and good at it — under new CEO Doug McMillon’s tutelage beginning in early 2014. The overhaul is evident within stores that dually sell general merchandise and groceries, but it’s even more prevalent with the company’s growing number of Neighborhood Market stores that focus solely on food. The potential revenue growth is significant, but as is the case with e-commerce, groceries can be a low-margin business.
  • International Growth: It’s interesting that Walmart is looking to expand into Canada — by planning to open 29 more stores in that market — while competitor Target Corporation (NYSE:TGT) has decided to abandon all 133 of its Canadian stores less than two years after entering the Canadian market. Is Walmart just as doomed? Maybe, but not likely. As management consultant Mark Satov explained of Target’s venture into Canada, “They came with a teaching mentality and not a learning mentality.” Walmart was and still presumably is willing to adapt to foreign customers rather than force those customers to adapt to the American way — a savvy way of thinking that should bode well for more global growth.

Bottom Line

The Walmart earnings figures due Thursday are likely to exceed estimates for the top as well as the bottom line. Even if they don’t, though, the company appears to be on the path toward improvement with Doug McMillon at the helm.

If WMT stock suffers a setback stemming from disappointing fourth quarter results, that-dip may be a long-term buying opportunity. The key is an increasingly plausible turnaround effort.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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