Walmart analysts likely to eye Flipkart acquisition, e-commerce and strategies at investor day


NEW YORK • Walmart Inc’s investor day topics are likely to include updates on the Flipkart Pte Ltd acquisition, select guidance metrics, the retailer’s e-commerce, Fresh, and international strategies. In addition, management will get a shot at easing investor concerns about wage pressures and Chinese tariffs at the 2018 Meeting for the Investment Community in Bentonville, Arkansas, tomorrow.

Shares of the retail behemoth have been on a recovery path for most of the year after falling more than 10% the day of fourth quarter (4Q) earnings in February. Walmart has since pared losses to less than 4%, and will have another chance to bolster investor enthusiasm this week.

This year’s investor day should be positive, given Walmart’s solid results from the first half of the year and a favourable macro environment, according to one Walmart bull. Telsey Advisory Group analyst Joseph Feldman expects the retailer to provide clarity on key topics like wages, tariffs and its recent Flipkart acquisition, which is expected to post losses.

“We expect an update on the company’s exposure to China and the impact of the 10% tariff and expected jump to 25% in 2019,” Feldman wrote in a note.

“We also anticipate a discussion of rising labour costs, especially in light of Amazon. com Inc’s recent increase in its minimum hourly wages to US$15 (RM62.40), starting on Nov 1.”

“In our view, this asset should pay off over time as Indian e-commerce develops, although like most e-commerce companies, this should drag results in the near term,” Feldman wrote. Walmart is rated an ‘Outperform’ at Telsey, with a price target of US$107.

Here’s what other Wall Street analysts are saying about the investor conference.

Cowen & Co’s Chen
Oliver Chen sees Walmart focusing on its e-commerce growth and margin management during the investor presentation.

“We forecast debates on trade-offs between share gains versus profitability,” wrote Chen in a note. Chen rates Walmart ‘Outperform’ with a US$115 price target that matches the Wall Street high.

Walmart shares are trading at 20 times earnings versus their three-year average of 16.8 times, which implies investor day upside could be muted, Chen wrote.

Guggenheim Securities’ Drbul
“With the Walmart US business on solid footing”, led by efforts in stores and e-commerce, Robert Drbul expects “emphasis to be placed on the international strategy, namely Flipkart”.

Walmart’s US e-commerce strategy will probably include smaller bolt-on acquisitions, “with the aim of expanding category and consumer demographic reach”. Investors shouldn’t expect an update on loss figures in the US e-commerce business.

On the international front, Drbul expects Flipkart (and the India strategy) to get most of the attention, but he doesn’t expect updated financial guidance related to the deal “beyond what has already been provided”.

Walmart is rated ‘Buy’ at Guggenheim, with a price target of US$110.

Consumer Edge Research’s Schick
Walmart may update guidance now that the Flipkart deal has closed, with the current forecast, which does not include Flipkart, calling for adjusted earnings per share of US$4.90-US$5.05. In May, Walmart initially called for deal dilution of US$0.25 to US$0.30 per share, assuming the deal closed in the second half of the year.

Additional meeting topics likely will include the retailer’s “continued efforts and progress in fresh, updates on price investments, and continued architecture and capabilities of omni-channel”.

Walmart is expected to stand by its commitment to “everyday sharp pricing in stores and online” as Target Corp focuses on basics and as the market faces more inflation.

David Schick believes Walmart’s efforts in Fresh (adding back team lead positions into stores, partnering vendors who move fresh product through supply chain more quickly) are bearing fruit, with Fresh seeing share gains versus traditional grocers.

Regarding omni-channel capabilities, investors may ask about progress toward e-commerce sales growth guidance of 40% year-over-year this year, as well as e-commerce growth around the holiday season.

BMO Capital Markets’ Bania
Key points of the meeting are likely to centre on an initial financial year 2020 (year ended January 2020) forecast and capital expenditure plan; US e-commerce losses; US grocery; wages; tariffs; freight and transportation costs; pharmacy; WMT International; and Sam’s Club.

Kelly Bania believes Walmart will reiterate its current year forecast, albeit reflecting the expected negative earnings impact from Flipkart.

Investors seem “overwhelmingly” sceptical that this year will be the peak year for US e-commerce losses. “Any commentary that US e-commerce losses are, in fact, expected to stabilise/possibly improve could be a positive for the stock,” Bania believes.

Wages commentary will also be of interest following Amazon’s recent announcement to raise entry-level wages to US$15 per hour, as well as Target’s commitment to raising entry-level wages to US$15.

This is a potential risk to the earnings outlook, as Walmart’s entry-level wages were last increased to US$11 an hour in February.

However, Bania believes Walmart is “one of the best positioned to weather wage pressure among US retail peers”, due in part to its technology investments that cut the amount of labor.

BMO rates the shares ‘Outperform’, with a price target of US$110.

Walmart’s investor meeting webcast will begin at 9am ET on Oct 16. A pre-meeting press release will be distributed ahead of the webcast at approximately 6:30am, which will include key messages and select guidance.

Street ratings on the world’s largest retailer, according to Bloomberg data, include 15 ‘Buys’ and 22 ‘Holds’. There is not one ‘Sell’ rating on the stock. The average 12-month price target is US$105, which implies 11% upside from the current level. Walmart will report 3Q earnings next month.