Are Weak Sales a Red Flag for Walmart Stock?

Supreme Court Hears Wal-Mart Sexual Discrimination Case

Source: Spencer Platt/Getty Images

Walmart (NYSE:WMT) is a household name that really does not require any introductions. What you may not be aware of is there has been some weakness in the stock and that Wall Street may be betting that there are going to be weak sales in the upcoming report. Now, year-to-date, the stock is down 4 percent. Walmart stock tends not to move with volatility as evidenced by the tight 52 week trading range of $71.51 to $81.37. However, with the comments that Walmart is not noticing any marked improvement in the economy, the question is: will sales in the upcoming quarter be weak?

Well, retail analysts have taken to Twitter (NYSE:TWTR) and voiced their concerns. In fact, this isn’t the first time that retail analysts have taken to Twitter to voice concerns. Last year, when Target (NYSE:TGT) suffered a major data breach, tweets on Twitter regarding the breach were quite prevalent. Twitter users took to their accounts to warn friends and family of the potential impact to their wallets. This, is turn, pressured Target’s sales last year, and to this day Target is still reeling. With this potential red flag for Walmart sales, one could question if Target is also setting up to be a victim from a so-so economy. That said, a look at Walmart’s first-quarter could shed light on if shareholders should be concerned.

In its first-quarter, Walmart saw diluted earnings per share from continuing operations of $1.10, a decrease of 3.5 percent compared to last year’s $1.14. Severe weather negatively impacted earnings per share by approximately $0.03, according to company estimates. Target’s earnings were also impacted by this weather. Another issue hurting the company was that the company’s effective tax rate for the quarter was higher-than-anticipated. Consolidated operating income was $6.2 billion, a decrease of 3.8 percent. Severe weather in the U.S. businesses negatively impacted the company’s profit.

Although there was a lot of sales pressures, Walmart managed to increases sales once again. Consolidated net sales rose approximately $0.9 billion, or 0.8 percent, to $114.2 billion. Walmart stores comparable sales were relatively flat as expected, down 8 basis points compared to last year’s quarter. Severe weather adversely impacted comp sales by approximately 20 basis points. Overall, Walmart U.S. net sales increased $1.3 billion, or 2.0 percent. Internationally, net sales were $32.4 billion, a decrease of 1.4 percent. Sam’s Club comp sales decreased approximately 0.5 percent. However, Sam’s Club delivered 10.9 percent membership income growth for the quarter. Further, as like most other retailers, e-commerce sales globally increased approximately 27 percent for the quarter. Doug McMillon, Wal-Mart Stores, Inc. president and chief executive officer, stated:

“Walmart’s first-quarter net sales increased 0.8 percent over last year. Like other retailers in the United States, the unseasonably cold and disruptive weather negatively impacted U.S. sales and drove operating expenses higher than expected. Walmart’s underlying business is solid, and I’m confident in our long-term strategies. We’ll continue to invest in price and enhance our service to improve sales. We remain focused on growth across the enterprise, especially in small formats like Neighborhood Market in the U.S. The company continued its significant investment in e-commerce initiatives, including the global technology platform, and sales worldwide rose approximately 27 percent. We have the opportunity to create transformative growth through stronger e-commerce capabilities. Our investments are focused on improving customer experience and fulfillment capacity. We’re working to deliver a relevant, personalized and seamless customer experience across all channels to further grow sales.”

Looking ahead, the company expects second quarter fiscal year 2015 diluted earnings per share from continuing operations to be between $1.15 and $1.25. This compares to $1.24 last year. Investors should be cautious here, as it is likely that true earnings will be hit by lower sales numbers and thus earnings could come in at the lower end of estimates. This guidance assumes incremental investments in e-commerce, headwinds from higher healthcare costs in the U.S., and increased investments in Sam’s Club membership programs. Given the stocks earnings, its dividend and the anticipated growth over the years, I still rate shares a buy and assign an $85 price target, although I caution investors the quarter may be disappointing.

Disclosure: Christopher F. Davis hold no position in Walmart and has no plans to initiate a position in the next 72 hours. He has a buy rating on the stock and an $85 price target.

More From Wall St. Cheat Sheet: