Walmart Stock Beats Earnings, But the Turnaround Isn’t Here Yet (WMT)

It’s possible we’ll look back on the latest Walmart (WMT) earnings report as marking an inflection point in the incipient WMT turnaround story, but let’s not get carried away just yet.

Walmart Stock Beats Earnings, But the Turnaround Isn't Here Yet (WMT)After all, Walmart earnings managed to beat on what were rather low expectations. And while Walmart offered an improved outlook, it wasn’t by all that much.

So while the earnings triumph lends support to the bull case that WMT’s investments in stores, employees and e-commerce are paying off, the company still faces serious macroeconomic headwinds.

WMT stock jumped more than 3% soon after the opening bell — a big move for a company with a market cap not far short of $300 billion — and is up about 5% in afternoon trading. That’s a bit too rich a reward for tripping over a low bar.

Remember, this is a stock that’s still down 30% for the year-to-date. Yes, it’s been a tough year for equities — the S&P 500 is essentially breakeven in 2015 — but Walmart is getting hit for some serious company-specific issues. (Note that WMT’s top competitor Target (TGT) is off less than 3% so far this year.)

On the international side of the equation, WMT’s strategic expansion plan never went quite according to plan, and now it’s getting hammered by a strong dollar. That’s par the course for all U.S. multinationals, and you can’t really fault WMT for currency woes beyond its control.

WMT even gets a pass on some of its domestic issues. The company can hardly be faulted for an economic recovery so weak that it’s left a huge chunk of its core customers largely untouched.

However, allowing stores and services to deteriorate to a level unacceptable to even the most disillusioned Walmart shopper was unforgivable — especially during a time it had to investment enormously in wages and e-commerce.

The wage hikes and investments in digital commerce will continue to clip earnings, but at least the effort WMT has made in its domestic operations is showing results. Indeed, improvements in customer traffic allowed WMT to report a fifth consecutive quarter of same-store sales growth, which is a critical measure of a retailer’s health.

Too Early to Give WMT the Benefit of the Doubt

But let’s not go nuts. Same-store sales rose 1.5% in the latest quarter and are forecast to increase just 1% in the current one. These are positive changes, but they’re incremental and vulnerable ones, too.

For the most recent quarter, Walmart earnings came to $3.30 billion ($1.03 a share) down from $3.71 billion ($1.15 a share) in the year-ago period. That beat the Wall Street estimate for 98 cents, according to a survey by Thomson Reuters. Walmart’s own forecast had called for earnings of between 93 cents and $1.05 a share.

Revenue slipped 1.3% to $117.41 billion, just missing the Street’s expectations of $117.86 billion. Were it not for currency effects, revenue would have grown 3%.

More than anything, the market is applauding WMT earnings forecast, which was the first one in a few years not to come in below analysts’ average estimate. For the current quarter, WMT sees earnings of between $1.40 and $1.55 share. The Street was modeling EPS at $1.43.

That said, the forecast still represents a sharp decline from year-ago EPS of $1.61, and next year is still going to come with a steep drop in earnings.

Things may not be as bad as they were at Walmart, but they’re still a long way from actually being good. That makes it far too soon to put any new money to work in WMT stock.

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

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