Walmart shares edged higher in early Monday trading following a key trading call from a Wall Street analyst ahead of the retail giant’s second quarter earnings later in the week.
Walmart (WMT) , which boasts a year-to-date advance similar to stocks in the Magnificent 7 tech group, has added more than $120 billion in value as it continues to capture an increasing share of spending from price-focused consumers battling stubborn inflation pressures.
Recent updates from online retail giant Amazon (AMZN) , however, as well as muted outlooks from brand groups such as Procter & Gamble PG and consumer discretionary names like PepsiCo PEP suggest consumer headwinds are stiffening into the autumn months.
Amazon’s finance chief, Brian Olsavsky, told investors earlier this month that consumers are “being careful with their spend, trading down (and) looking for deals” over the second quarter, adding that “we’re seeing signs of it continuing in Q3.”
Retail sales have been holding up well, however, and were pegged at a total of $704.3 billion for the month of June by the Commerce Department, a tally that topped Wall Street forecasts.
Walmart’s “Everyday Low Price” model is starting to attract higher income customers in a stick inflation environment.
Image source: Tim Boyle/Getty Images
Amazon’s Prime Day sales, meanwhile, hit a record $14.2 billion for the 48 hour period last month, according to data from Adobe Analytics, an 11% improvement from last year’s tally.
Consumer spending pullback
That said, with unemployment levels starting to edge higher, and the job market picture becoming cloudier into the coming months, analysts expect a pullback in consumer spending that is likely to lead to a broader economic slowdown.
Evercore ISI analyst Greg Melich, however, sees Walmart “reaffirming its status as a relative safe haven amidst a volatile consumer backdrop” when it reports second quarter earnings Thursday and expects the group to reiterate its full-year sales and profit outlook.
Analysts expect Walmart to post overall sales of $168.5 billion for the three months ending in July, a 4.3% increase from the same period last year, with earnings rising 6.6% to 65 cents per share.
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Earlier this spring, Walmart said it sees sees earnings at the higher end of, or slightly above, its standing forecast of $2.23 to $2.37 per share, with net sales rising between 3% and 4% from 2023 levels.
Walmart also appears to be gaining market share from higher income consumers, particularly in its grocery category, which provides a level of stabilization for the stock as its broader slate of initiatives, including its e-commerce strategy, keeps shoppers in the Walmart ecosystem.
“While management is pleased with unit share gains within general merchandise, it sees additional opportunity ahead to gain share, aided by Marketplace and in-store improvements,” said KeyBanc Capital Markets analyst Bradley Thomas following a visit with Walmart executives in Bentonville last month.
Tactical call on Walmart stock
“More specifically, store remodels lay the groundwork for the Company to offer a better assortment across general merchandise (and in apparel and home, most specifically),” said Thomas, who carries an $82 price target with an ‘overweight’ rating on Walmart.
Melich expects an “in-line” quarter for the group, while issuing a “positive tactical call” on the stock heading into the Thursday print.
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“Risks to the call include potential for moderating demand trends after quarter-end that could cause Walmart to take a more conservative outlook on 2H24, the risk of ongoing wage inflation, tech investment, and remodel spend which could result in elevated SG&A, increased ocean freight costs, and/or competition,” Melich said.
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“If Walmart misses 2Q and/or lowers its 2H EPS outlook, we believe the stock could fall by a mid to high single-digit percentage as execution slip-ups could challenge its safe haven status,” said Melich, who reiterated his $74 price target and ‘outperform’ rating for the group.
Walmart shares were marked 0.65% higher in premarket trading to indicate an opening bell price of $68.35 each.
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