Source: PaxForex Premium Analytics Portal, Fundamental Insight
Wall Street expressed disappointment with Walmart's latest earnings update, especially given its timing on the verge of the crucial holiday shopping season. Professional traders had anticipated a more optimistic outlook from the management team regarding short-term growth.
However, despite the initial market reaction, Walmart's report revealed a positive trajectory by raising its 2023 outlook for a second consecutive quarter. Notably, the company exhibited promising trends related to market share and profits. Let's explore three reasons why the stock's decline in response to the earnings report seems to be an overreaction, signaling the potential for Walmart in the remainder of 2023.
- Solid, though Mixed, Growth
Walmart sustained its impressive sales trends for the third consecutive quarter, with a 5% increase in comparable-store sales - only a slight deceleration from the previous quarter's 6% rise. Examining the details, growth presented a mixed picture. Walmart achieved a commendable equilibrium between growing customer traffic and increased average spending. Notably, the company did not solely depend on higher prices to drive sales, continuing to capture market share in the grocery segment at the expense of competitors like Kroger. Additionally, the health and wellness niche expanded.
However, there was a deceleration in Walmart's spending growth compared to the preceding quarter. The report disclosed declining sales in the general merchandise segment, focusing on consumer-discretionary products. While this segment appeared to be rebounding in the last quarter, the recent update suggests that consumers are not yet inclined to increase spending more aggressively.
- Walmart's Financial Resilience
A bright spot in the aftermath of Walmart's recent earnings report is the robust health of its financials. Despite a nominal dip in operating income during the fiscal third quarter, this decline was attributed to a strategic shift in the timing of a sales event rather than any intrinsic performance issue. Upon adjusting for this tactical move, the operating profit margin experienced another positive uptick. More significantly, the financial landscape for shareholders became even more favorable with a noteworthy surge in cash flow, rising by an impressive $3 billion to reach $19 billion. This financial strength translates into multifaceted benefits for investors. Walmart can actively invest in growth initiatives, bolstering its dominance in key sectors such as e-commerce. The financial resources also enable the company to maintain a position of price leadership, attracting customer traffic. Furthermore, the surplus cash facilitates direct returns to shareholders through dividends and stock buybacks.
- Guidance for Future Growth
Walmart's forward-looking indicators are pointing in a promising direction. Notably, inventory experienced a decline of $1 billion, reaching $64 billion. This slight reduction signifies that the management is adept at understanding current demand trends and is keen on avoiding excess inventory as the holiday season approaches. Striking the right balance, however, remains crucial, as maintaining a lean inventory while meeting demand is a delicate dance.
Looking ahead to 2023, Walmart's growth trajectory is gaining momentum. The company now anticipates sales to increase by 5% to 5.5%, a notable upward adjustment from the previous range of 4% to 4.5%. This guidance represents a significant positive shift, considering that the growth projection started the year at just 3.5%. Although the earnings forecast remains unchanged, investors can still anticipate robust profit growth and a modest increase in the operating profit margin.
Despite shares entering the report with performance closely aligned with the market's 17% return to date, Walmart stock has seen a slight lag, showing a 10% increase so far in 2023. Investors are encouraged to view this relative discount as an additional reason to favor this dominant retailer. While Walmart approaches the holiday season with prudence in light of uncertain consumer spending patterns, the company boasts strong customer traffic and rising profit margins. Coupled with a growing dividend payment, these factors create a compelling narrative for positive investor returns in the foreseeable future.
As long as the price is above 154.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 155.57
- Take Profit 1: 160.00
- Take Profit 2: 164.00
Alternative scenario:
If the level of 154.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 154.00
- Take Profit 1: 152.00
- Take Profit 2: 148.00
