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Earnings Outlook: Walmart earnings: Can groceries, back-to-school sales help avert another profit warning?

Walmart Inc. is scheduled to report fiscal second-quarter results next Tuesday, and investors are surely wondering whether last month’s profit warning was enough to clear the decks, so the discount retail behemoth can get back to beating expectations.

An important question to be answered for investors is how Walmart’s grocery business, which is typically a category that is resistant to changes in economic cycles, fared in the current high-inflation environment, and how much consumer wallet share it took from other categories. Another is how much of a boost back-to-school shopping provided to the results and for the full-year outlook.

Walmart’s
WMT,
+1.85%

grocery business is by far its largest. Grocery revenue was $56.76 billion in the first quarter ended April 30, or 58.6% of total revenue of $96.90 billion. To put that in perspective, that’s more than grocery chain Kroger Co.’s
KR,
+0.60%

total first-quarter revenue of $44.60 billion, and more than double Target Corp.’s
TGT,
+1.70%

total first-quarter revenue of $25.17 billion.

When the retailer cut its full-year outlook in late July, just two months after cutting it when reporting first-quarter results, the company said the more money its lower-income customers were spending on food, which has lower margins, was making them spend less on higher margin general merchandise.

As a result, it had to implement more markdowns to get rid of excess inventory, particularly in apparel, which also hurt margins.

Don’t miss: Walmart customers are spending on food, and not much else, as inflation takes a toll.

Walmart had missed first-quarter earnings-per-share expectations for the first time in five quarters, and for just the third time in four years, according to FactSet data.

With the latest profit warning, FactSet EPS consensus for the second-quarter, which ended July, fell to $1.62 from $1.81 at the end of June, while the full-year EPS consensus dropped to $5.69 from $6.39.

There are some who believe the last outlook cut may have cleared the decks, and the worst may be over, as the latest data showed that overall consumer inflation paused in July and spending may have improved.

Walmart’s stock 1.8% to close Friday at $132.22. It has run up 5.3% amid a six-day win streak, and has climbed 8.4% since the profit warning.

FactSet, MarketWatch

And as J.P. Morgan analyst Christopher Horvers wrote in a recent note to clients: “In general, trends decelerated in June, coinciding with peak gas prices and long-awaited summer vacations, before improving in July as prices came down and back-to-school shopping started across the country.”

In addition, Walmart Chief Executive Doug McMillon said in July that while he was anticipating more pressure on general merchandise in the second half of the year, he was “encouraged” by the start of back-to-school shopping.

But while the Consumer Price Index was unchanged in July, and year-over-year inflation rate fell to 8.5% from 9.1% in June, grocery inflation accelerated. After rising 1.0% in June, food-at-home (off-premise) costs increased 1.3% in July to lift the year-over-year inflation rate to 13.1%.

Despite the improving overall trends at the end of Walmart’s quarter, inflation data creates some downside risk for earnings and guidance, given the impact of rising food costs on the wallet share of its lower-income customers.

J.P. Morgan’s Horvers, who has rated Walmart neutral for at least the past three years, said there are two areas of management commentary he will focus on: 1) any broad consumer commentary, including back-to-school trends and 2) the “phasing” of the second-half profit outlook.

“[W]e see risk that [Walmart] will push down 3Q consensus and weight the year more toward 4Q when its inventory is expected to be clean,” Horvers wrote.

The FactSet consensus for third-quarter EPS is $1.29, down from $1.55 at the end of June.

Basically, Walmart could provide a downbeat third-quarter outlook while keeping its full-year guidance intact.

Walmart’s stock has slumped 10.7% over the past three months and has dropped 8.6% year to date, while the Dow Jones Industrial Average
DJIA,
+1.27%

has advanced 4.9% over the past three months but lost 7.1% this year.

Other Q2 numbers to watch:

FactSet consensus:

Total revenue: $150.99 billion, up 7.1% from a year ago (full-year revenue consensus of $597.07 billion implies 4.2% growth).

Walmart U.S. revenue $104.42 billion.

Sam’s Club revenue $21.52 billion.

International revenue $23.92 billion.

Overall same-store sales growth of 6.1%.

Walmart U.S. same-store sales up 5.9%.

Sam’s Club same-stores sales up 10.1%.

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