Walmart earnings: Expectations for e-commerce growth are sky-high

Walmart is creating a new kind of retail that brings together stores, digital, and more

UBS analysts say the market expects 40% e-commerce growth

Walmart Inc., which reports fiscal third-quarter earnings on Thursday before the bell, is bringing together a variety of services and shopping experiences to create a new kind of retail experience, analysts say.

Cowen analysts, writing after last month’s investment community meeting, said the retail giant is using its scale, global growth potential, e-commerce focus and Neighborhood Markets to its advantage. Its 4,700-plus U.S. locations, once seen as a drag, are now an asset.

“In Cowen’s view the Walmart brand is at the center of a new ecosystem which integrates shipping, services, health and wellness, and first party and marketplace e-commerce,” analysts led by Oliver Chen wrote in a note.

Cowen rates Walmart WMT, -0.90% shares as outperform with a $115 price target, equal to 11% above its current trading level.

Quo Vadis President John Zolidis says Walmart has taken a leading e-commerce position, with its wide network of stores “being digitalized” in order to provide service wherever the customer may be.

“These digital initiatives coupled with retail fundamentals including providing value to the customer and stronger execution at the store level are combining to produce share gains in customer trips and sales in a strong consumer environment,” he wrote in a note published Monday.

Pressure in areas like margins and earnings per share are an issue. “However, we believe the market will continue to look past these investment-related pressures provided that Walmart is generating revenue growth that indicates its approach is working,” Zolidis wrote. “[O]ur view is that accelerating traffic and online growth demonstrate that the company’s investments in price, store labor and execution and technology are working to provide a superior consumer offer.”

Walmart was ranked number four on the 2018 Gartner L2 Digital IQ Index for U.S. big-box retailers. (Amazon.com Inc. AMZN, -0.35% took the top spot, followed by Best Buy Co. Inc. BBY, -0.15% and Home Depot Inc. HD, -0.24% )

Both Walmart and Target Corp. TGT, -1.35% are driving traffic to stores while also offering free shipping and other perks, taking the digital battle directly to Amazon, the report said.

“Furthermore, Walmart’s recent expansion of same-day delivery through Walmart Spark Delivery and Jet’s new three-hour grocery delivery for urban customers show that retailers are also moving into the rapid delivery space to compete with Amazon Prime Now,” the report said.

Walmart U.S. e-commerce growth was 40% in the second quarter, and UBS analysts think the market will be looking for 40%-plus in the third quarter.

Walmart stock has an average overweight rating with an average price target of $104.72, according to 34 analysts polled by FactSet.

Here’s what to expect:

Earnings: Walmart is expected to report earnings of $1.01 per share, according to FactSet, up a penny from last year.

Estimize, which crowdsources estimates from sell-side and buy-side analysts, hedge-fund managers, executives, academics and others, expects per-share earnings of $1.06.

Walmart beat FactSet earnings expectations for 11 of the last 12 quarters.

Revenue: FactSet is guiding for revenue of $125.4 billion, up from $123.2 billion last year.

Estimize expects revenue of $125.7 billion.

Walmart has beaten FactSet revenue expectations for the last five quarters.

Stock price: Walmart shares have rallied 14.8% for the last three months, and 4.2% for the year to date.

The Dow Jones Industrial Average DJIA, -0.40% has gained 2.3% for 2018 so far and the S&P 500 index SPX, -0.15% is up 1.8% for the period.

Other issues:

-UBS expects U.S. same-store sales to decelerate from the 4.5% it reported last quarter.

“Importantly, there’s likely to be questions of how it can sustain its e-commerce growth during the holidays when it has a $35 minimum purchase threshold for free shipping when Amazon, Target and Best Buy have no minimum,” analysts led by Michael Lasser wrote. “Still, given that the company has already guided for next year and has many levers to influence its performance, it’s unlikely that estimates are going to head down in the near-term.”

Walmart expects U.S. e-commerce growth to be about 35% in fiscal 2020.

UBS rates Walmart shares neutral with a $105 price target.

-Cowen analysts say seasonably cold weather, and an extra shopping day in addition to low unemployment and high consumer confidence will drive a healthy holiday season.

-Overlap between Amazon and its competitors has reached its peak.

“Shopper overlap with Amazon is likely at, or near maximum proliferation and we believe significant growth is unlikely,” Cowen wrote in a note published Tuesday.

Walmart overlap in the third quarter was 82.7%, according to analysts, down from 84.9% in the fourth quarter of 2017.

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