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Retail

Walmart Investors Eye Margins Amid Grocery Focus

By Reuters
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Walmart Investors Eye Margins Amid Grocery Focus

When Walmart reports earnings Thursday, investors will get an even closer look at how American shoppers shifted their spending when faced with higher prices on groceries and most other merchandise.

Shoppers recently have been cutting back on their purchases of clothing, TVs and furniture - goods that tend to be more profitable for Walmart and other retailers. Home improvement chain Home Depot cut its annual forecast on Tuesday, indicating weakness for retailers who sell discretionary merchandise.

Well-Positioned

Yet many shoppers have turned to Walmart for its low-priced basics such as toilet paper, milk, green beans and eggs. Groceries account for more than half of Walmart revenues.

Walmart seems well-positioned to beat its earnings expectation for the first quarter. Telsey Advisory Group, UBS and Citi were among brokerages that believe Walmart would raise some of its outlook targets Thursday after issuing a cautious full-year forecast earlier this year.

'Emerging Opportunities'

"The narrative around Walmart is that not only is it a bastion of safety in this otherwise uncertain world, but it is also a company that is capitalising on its myriad emerging opportunities as it adapts to a digital landscape," UBS analyst Michael Lasser said.

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Investors such as Charles Sizemore, chief investment officer of Sizemore Capital Management, are looking for any specific hit to Walmart's so called gross profit margin. This metric, the ratio of gross profit to revenue, was around 24.14% for the year-ended January 31.

"My question would be, for this quarter, if they are seeing any erosion in gross margins and what that looks like," said Sizemore, whose firm which holds $2.4 million (€2.2 million) in Walmart shares.

Retail Earnings

Other potentially telling clues will be whether the average transaction at Walmart is bigger, or smaller, or if there were more transactions overall in the first quarter.

Walmart usually kicks off the retail earnings season and because of its size, it sets the tone for the rest of the industry. This quarter, however, its rival Target reports first, posting results on Wednesday with Walmart on Thursday.

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Forecasts

Executives at Bentonville, Arkansas-based Walmart in February had forecast operating margin between 3.5% to 4% for the first quarter, up from 3.28% for the year ended January 31.

David Klink, senior equity analyst at Huntington Private Bank, which holds $77 million (€70.9 million) in Walmart shares, said that if Walmart can re-affirm its margin targets, "that would be very well appreciated by investors."

Analysts on average are expecting the retailer to post first quarter margins of 3.7%, according to UBS.

US retail sales rose 0.4% in April, the Commerce department reported on Tuesday, suggesting that the economy was experiencing a spring revival after activity slowed in February and March.

News by Reuters, edited by ESM – your source for the latest retail news. Click subscribe to sign up to ESM: European Supermarket Magazine.

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