Walmart Stock’s Bounceback Faces a Big Test in Earnings

That’s because in late July, Walmart cut its profit outlook for the second quarter and the full fiscal year. The company said higher inflation was forcing customers to spend more—hence ongoing sales strength—but that wasn’t flowing through to the bottom line. With their budgets stretched, shoppers were focusing on the basics and not buying things like clothing and home goods as readily as they were before. Walmart in turn had to offer steep, margin-eroding discounts to move excess merchandise it had over-ordered, based on previous consumer spending patterns and ongoing supply chain disruptions.

Fellow big box store Target (TGT) said much of the same when it had to cut its outlook twice in less than a month, and Walmart’s own guidance reduction was followed soon after by a similar update from
Best Buy
(BBY).

Although Walmart stock initially plunged on the news, falling 7.6% on July 26, it then saw a long streak of gains, not ending lower again until August 3. The shares have been hovering very close to where they were before the announcement.

That may mean there is little room for error or further bad news in Walmart’s coming report. The shares are trading right around their historical average of 21.6 times, despite economic uncertainty and swirling worries about Americans’ ability to keep spending. So investors may be looking for any excuse to lock in their gains and sell on the results.   

At the same time, Walmart remains popular on Wall Street. Seventy-three percent of the 37 analysts tracked by FactSet have a Buy rating or the equivalent on Walmart, with an average price target of nearly $141. There are no bearish calls on the stock.

And that optimism isn’t entirely misplaced, despite headwinds for consumers: In 2008, Walmart was one of the top ten performing stocks in the S&P 500 by total returns, meaning many may believe that it can outperform in a downturn, even if other retailers suffer.

Write to Teresa Rivas at teresa.rivas@barrons.com