The implications of the earnings cut for Walmart’s share price (NYSE:WMT)

Summary:

  • WMT reported an expected decline in Q2 and full-year 2023 earnings of 11% to 13%, implying net profit of approximately $12.16 billion, a 24% reduction from previous analyst estimates .
  • The market may have a harder time justifying the previous 27.8x premium PE, and the stock may converge closer to the market average of 22.8 PE.
  • The main reason given for the erosion of profits is inflation, with the clothing segment being the hardest hit.

walmart (NYSE:WMT) announced that it was cutting its earnings estimates for the second quarter and 2023 to a decline of between 11% and 13%. Practically, as earnings are expected to fall about 11% for fiscal 2023, the company is expected to earn about $12.16 billion, down 24% from the $16 billion analysts estimated for 2023. This 24% drop in expected earnings is the main reason for the stock price correction after the announcement.

In the chart below, we can see analysts’ expectations before the drop in future earnings:

See our latest analysis for Walmart

NYSE: WMT earnings forecast ahead of latest announcement, July 26, 2022

Once analysts update their forecasts, we can expect a rather different picture of Walmart’s future earnings. Ever since the announcement broke, analysts have wondered “if and to what extent” this inflation-based erosion will impact other retailers. This is something investors may want to reevaluate, as Walmart is one of the strongest companies out there, while others may suffer even more.

Other highlights from Walmart’s announcement

  • Expected second quarter sales growth of 7.5% or $152.19 billion.
  • Estimated Q2 operating margin of 4.2%, or $6.39 billion.
  • Q2 Adjusted EPS is expected to decline approximately 8.5%, resulting in an estimated $1.19 (vs. $1.3 previously).

Currently, operating profit for the last 12 months is $24.351 billion and a reduction in margin from 4.2% to 3.9% would imply $22.6 billion.

Sales are expected to be higher in FY23, but this is almost entirely due to inflation. Investors may struggle with inflation, as it boosts sales but erodes profits. We also have to keep in mind that Walmart is a $330 market cap retail giant with significant pricing power, indicating that the company may have used a lot of its tools. and still suffers from the effects of inflation.

The company pointed out that its food inflation figures are in double digits and higher than in the first quarter. For their part, the the category most “affected” by inflation is clothing.

What the Change in Earnings Estimates Mean for Walmart Stock

Walmart was trading at a higher price-to-earnings ratio (27.8x since last close) than the general market (22.8x) and the retail sector (18.9x). For this to be sustainable, a business must have high growth implications, high returns on capital and low risk. When those assumptions get shaky, investors can start pricing the stock from “what it could be,” based on how it actually performed today. This is partly why so many growth stocks have fallen over the past two quarters – growth expectations have fallen and market risk has increased. For Walmart, investors may find that future growth expectations can no longer justify a premium PE, and the stock may converge between retail PE and market PE. Note that the company always has a return on capital greater than its cost of capital, and prices may continue to change until we can achieve predictable (not necessarily lower) inflation control.

Considering this scenario, we see that the stock is 18% exposed to a decline from the general market PE of 22.8x. This would imply a price reduction from $132 (since yesterday’s close) to around $108, or a market cap drop from $362.4 billion to $297 billion. As you can see, this is only a bearish scenario and the stock has intrinsic value and stability advantages that are not factored into our analysis, which may protect the business. larger declines.

Conclusion

Walmart’s discount to future earnings estimates is likely material to the company’s stock price. Although the effect may not be long term, the market appears to have reacted fairly to the news and it may take longer for the company to recover to prior levels.

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Simply Wall St analyst Goran Damchevski and Simply Wall St have no position at any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials.

Karen J. Nelson