Tuesday, February 18, 2020

Is Walmart Hurting from Online Losses?

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What’s happening: Walmart is scheduled to report its fourth-quarter results before the opening bell on Tuesday, February 18. The retail giant has been seeing growing losses in its ecommerce business and investors are keen to know how this has impacted bottom-line in the all-important fourth quarter.

What happened: Walmart has beaten the consensus earnings estimates every quarter for the past seven quarters. However, the company has missed revenue expectations twice in the previous three quarters.

The fourth quarter is the most important for retailers, as the holiday season can be responsible for as much as 30% of their annual sales. Walmart’s shares have, however, been under pressure in recent months, as the holiday season in 2019 was six days shorter. Rival Target has just disappointed investors with weak holiday sales and a lowered sales outlook. Moreover, there’s growing concern over Walmart’s ecommerce business achieving profitability.

  • The consensus revenue estimate stands at $141.67 billion, representing 2.1% year-on-year growth.
  • The earnings estimate is $1.44 per share, a 2.1% rise versus the same quarter in the previous year.
  • Same-store sales are expected to have grown 2.8% in the fourth quarter.

Why it matters: Over the past three months, there have been downward revisions in Walmart’s revenue and earnings estimates. The shorter holiday season last year is expected to have hurt overall sales.

While Walmart has seen its online sales grow, especially in its grocery business, the retailer’s ecommerce losses have been growing too. This is because Walmart has been investing heavily in remodelling its ecommerce business to give strong competition to Amazon. The Arkansas-based retailer expanded its omnichannel capabilities by establishing partnerships with Tencent and JD.com as well as investments in last mile delivery capabilities across international markets.

Walmart had reported a 41% growth in ecommerce sales in the US for the third quarter. However, this business has continued to be a drag on the company’s profits.

Walmart had announced in December that it was testing an autonomous grocery delivery pilot program with robotics company Nuro. The retailer aims to improve its offerings with technologies such as artificial intelligence and autonomous delivery, which it believes would gain strong momentum over the next five years.

Recent stock performance: Walmart’s shares have declined by 2.7% over the last three months, although the stock has gained 19.2% over the past year. This is higher than the Dow Jones index, which has climbed 15.7% in the same period. So, despite the current weakness, the shares are trading at elevated levels and could experience further pressure if the company is unable to contain losses in its ecommerce business.

What to watch: The market will watch the Dow Jones and S&P 500, where Walmart is a major constituent. During the earnings call, investor focus will be on the retailer’s recent initiatives in store remodelling and new offerings like in-store pickup and home delivery. Investors will also be keen to know whether Walmart’s ecommerce losses have peaked or are continued to grow. The company is also expected to discuss the coronavirus impact on its business and initiatives in place to tackle the issue.

The Markets Today

     

The sterling is likely to be in focus today, after a strong rally last week and with key economic data from the UK scheduled for release.

Context: The GBP/USD rallied last week, with the pound adding more than 200 points versus its November lows. The pound was supported by upbeat economic growth data from the UK and PM Boris Johnson’s cabinet reshuffle. After the strong performance, the British currency slipped versus the greenback in the previous session.

Details: The sterling has been reacting to Brexit-related news over the past three years and this does not seem to have changed. The unexpected resignation of Sajid Javid as chancellor and stronger-than-expected 0.3% growth in the GDP lifted the pound last week.

Why it matters: With Britain and the European Union preparing for Brexit talks in March, the pound is expected to remain volatile. There are concerns over the EU’s harder negotiation approach. Britain will be releasing a bunch of economic reports this week, which would play a key role in the Bank of England’s actions over the next months.

All eyes are on the unemployment rate and labour productivity data, scheduled for release today, as these are important indicators of economic growth.

What to watch: Preliminary estimates show unemployment rates remained unchanged at 3.8% in December, which is its lowest level since early 1975. The claimant count (number of people claiming unemployment benefits), which rose by 14,900 in December, is likely to increase by another 22,600 in January.

Other Markets: Most European indices closed higher on Monday, with the UK 100, German 30 and French 40 up 0.33%, 0.29% and 0.27%, respectively

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What else to watch today

     

China's outstanding yuan loan growth, Saudi Arabia’s inflation rate, Eurozone Zew economic sentiment index, German Zew economic sentiment index, Russia’s producer prices, Canada’s manufacturing sales, speech by ECB’s Fabio Panetta and the NY Empire state manufacturing index and NAHB housing market index from the US.