Fourth-quarter earnings from Walmart (NYSE:WMT) released on Tuesday morning were hardly impressive. And yet, investors seemed to have shrugged off the weak numbers. Walmart stock actually rose nearly 2% in trading Tuesday, before giving back those gains in midday trading Wednesday.
From one perspective, that trading makes some sense. Q4 numbers were a bit soft, but external circumstances played a role. However, the outlook for fiscal year 2021 seems “good enough”, if not quite spectacular.
More broadly, investors have shown little inclination to sell U.S. equities under any circumstances. After all, the coronavirus from China is still sparking legitimate fears of a global pandemic — yet stocks are up since the new virus began to spread.
But for those investors who believe that both Walmart stock and the broad market rally has gone too far, Walmart earnings should sound a note of caution. On an earnings basis, WMT stock isn’t cheap. And this report doesn’t look like enough to drive significant buying at these levels.
For the rest of the market, meanwhile, earnings from Walmart and performance elsewhere adds to the sense 2020 could be a more difficult year for U.S. stocks than investors seem to believe at the moment. It’s not yet time to panic, but warning signs are flashing for retail and the market as a whole.
Walmart Earnings Not As Bad as They Look
On its face, Walmart’s fourth quarter earnings report looks rather negative. Comparable sales in the U.S. rose just 1.9%, against consensus expectations for a 2.4% increase. Adjusted earnings per share (EPS) fell short of the average Wall Street estimate by six cents, the company’s first bottom-line miss in two years.
Furthermore, even the outlook for this year looks soft. Walmart’s guidance for adjusted EPS is $5 to $5.15, against a consensus projection of $5.21.
Looking closer, however, the report isn’t quite as worrisome as the headlines suggest. The Christmas shopping season this year was shorter than usual, which likely pressured sales. Walmart’s rival Target (NYSE:TGT) posted just a 1.4% same-store sales increase during its holiday season. Meanwhile, Macy’s (NYSE:M) disclosed negative comparables in its preliminary figures released earlier this month.
As far as FY21 guidance goes, Walmart still is investing in its e-commerce businesses. Those businesses posted a larger-than-expected loss in FY20, but should get closer to profitability this year. And the company expects roughly 3% same-store sales growth for the full year. That implies a rebound from fourth-quarter levels, and provides further evidence that the calendar had a significant impact on revenue and profits in the quarter.
And so, investors are staying patient. Which, again, makes some sense.
The Case Against Walmart Stock
Overall, it’s fair to wonder how long that patience will last for Walmart stock. Shares trade at 23x the midpoint of FY21 EPS guidance — one of Walmart’s highest multiples in years. E-commerce losses admittedly drive some of that valuation. Walmart earnings would be higher, and its price-to-earnings (P/E) multiple lower, without those investments. Still, this is a stock that generally traded at mid- to high-teen P/E multiples for most of this century.
It’s also worth noting that while Walmart earnings did have some extenuating factors, the same is true of the company that now is its biggest rival. But, Amazon (NASDAQ:AMZN) posted an absolute blowout fourth quarter, with strong U.S. sales over the same period.
There’s a combination here of a high valuation, and decent but unspectacular performance. With WMT stock already stalling out heading into the report — shares are flat to late September levels — I’m skeptical there’s enough here to drive a rally going forward. Walmart stock isn’t a short by any means, but it’s tough to pound the table too forcefully after this week’s report.
It’s fair to wonder, too, whether the patience afforded Walmart stock will extend elsewhere in the sector. After all, most retailers have their own fourt-quarter reports on the way in the coming weeks.
Those reports, too, may disappoint — and so could their guidance. If the calendar impacted Walmart and Target to this extent in Q4, it’s likely smaller, more challenged retailers struggled as well. Many retailers already have disclosed preliminary results, but those that haven’t may have negative surprises on the way.
Even Walmart’s FY21 comp guidance raises questions. Is around 3% growth that impressive this late in an economic recovery? Given that the company’s e-commerce sales are growing at 30%-plus clip, in-store sales growth likely remains anemic. That’s concerning at a time with a record-low unemployment rate. And it, too, suggests potential problems elsewhere in the retail sector.
Outside of the leaders, retail stocks have struggled mightily during this bull market. Walmart earnings don’t provide any evidence that’s going to change.
Broad Market Fears
I’d also look at Walmart earnings in conjunction with another report on Tuesday that didn’t get much attention. Office furniture manufacturer Knoll (NYSE:KNL) badly missed estimates with its Q4 performance. And that company pointed to a significant slowdown in industry demand during the second half of 2019.
The worry for the U.S. stock market and the U.S. economy right now is that the U.S. consumer is the only thing holding both up. American manufacturing was in a recession for all of 2019. Knoll’s report and guidance for 2020 suggest corporate spending may slow amid worldwide uncertainty, and ahead of a highly contentious presidential election.
In that environment, if the U.S. consumer gives way at all, U.S. stocks will be in trouble — and that includes WMT. And while Walmart earnings don’t necessarily suggest the consumer is giving way, they’re not spectacular, either.
With Walmart stock at over 23x this year’s earnings, “not spectacular” might not be enough. With broad market indices at all-time highs, the same is true.
So, it’s not yet time to panic — but it’s certainly time to at least be more cautious.
After spending time at a retail brokerage, Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets. He has no positions in any securities mentioned.