Walmart Earnings Ahead: Eyeing Operating Costs And Impending Release Of Walmart+

Key Takeaways:

  • Pandemic-related costs could continue to pull down net earnings
  • Investors will be looking to see if Walmart WMT has maintained its market share
  • The coming launch of Amazon AMZN Prim AMZN e competitor Walmart+ could alter the online retailing space

When Walmart (WMT) opens its books this week, investors might get a better picture of how the industry adjusted to the vagaries of the coronavirus pandemic in the early days of summer. And during the company’s post-release conference call, some analysts may be listening for clues as to the direction of consumer spending trends.

That’s a heavy load, but as the world’s largest brick-and-mortar retailer, WMT is seen as uniquely positioned to do that. The retailer’s 10% sales growth in Q1 2020 helped demonstrate how its heavy investment in e-commerce and its wide array of stock keeping units (SKUs)— they’re really just all the different products—may have paid off at a time when consumers were homebound, hoarding, and shopping online or using curbside pickup.

But that’s also when WMT was one of the few retailers considered “essential” and allowed to keep its doors open because of its large grocery component while the vast majority were shuttered.

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Analysts said WMT’s robust results in Q1 and its ability to pivot to limited store hours with stiff social-distancing dictates, as well as provide delivery and curbside pickup en masse—during a period when even e-commerce giant Amazon (AMZN) had a few stocking and delivery hiccups— might have given it some market share in Q1.

But Q2’s results could be a whole different story, according to a number of analysts who expect to see that WMT’s sales, like many others besides AMZN, tapered off as more cities and states began to relax stay-at-home mandates and more retailers (i.e., WMT competitors) got back to business.

Many analysts see WMT’s operating costs as having risen—even vs. Q1’s pandemic-related outlays—meaning profit margins could be pressured again.

On average, analysts are expecting to see overall sales rise to $135.4 billion vs. $130.4 billion a year ago but projected costs could pull net income down to $3.6 billion from $3.8 billion last year, according to FactSet.

The High Price of the Pandemic

Like AMZN—and, really, every other retailer that has to butt heads with the e-commerce giant—the pandemic has been a costly exercise in taxing worker productivity and upping safety standards.

According to company documents, incremental costs tied to the health crisis surged $900 million in Q1 to cover extra associate pay, benefits and bonuses, new cleaning crews, sanitation supplies, personal protective equipment, additional staff to man doors and store capacity, plexiglass installs at cash registers, dedicating curbside pickup space and the like.

What did those costs look like in Q2? Expect more of the same, if Chief Financial Officer Brett Biggs’ guidance holds true. On the Q1 call, Biggs said much of those costs were related to special bonuses for all those workers who took on front-of-the-line duties in the early days. WMT was expected to repeat those types of thank-you pay bumps in Q2, meaning those incremental costs could total another $900 million—or more—in Q2.

“If you look at the bonus we’ll just pay in the second quarter that gets you more than a third of the way to the total cost we were at the end of Q1,” Biggs said on the call. “So, if the costs were in that ballpark again in Q2, I think that would probably be a fairly reasonable assumption at this point.”

Were they? Or could costs have risen even further as consumers turned to contactless home delivery—another pricey line item to expenses?

WMT’s strong Q1 sales led to a 3.9% gain in operating income, helping to somewhat offset those higher expenses, but it was still below the 4% increase in the year-ago period. Analysts said they are eager to see Q2’s numbers.

Market Share and Job Cuts

Market share is top of mind for some analysts, considering that WMT continues to make some aggressive moves to keep its competitive juices alive as AMZN has busted forward.

But there are other competitors out there angling for share too, such as Costco (COST), Kroger KR (KR), even Dollar General DG (DG), all of which reported double-digit gains in sales at stores open longer than a year in Q1.

WMT’s Biggs thinks its overall business model to cut across all channels in a seamless fashion could be a market share game changer. “The actions we’re taking across the company are building associate and customer trust and should position us to capture an incremental market share in the future,” he said on the Q1 call.

“While we’re adapting to the changing environment, our goals remain the same. We’re focused on building the world’s greatest omni-channel platform,” he added.

Here’s something else investors might be interested in hearing more about: job cuts. A memo to employees in late July noted WMT was “streamlining some roles so we can be more effective and more efficient,” according to a Bloomberg story.

The streamlining is part of a corporate job-cut plan that could be in the hundreds, according to the same story. The retailer admitted to the corporate cuts but hasn’t shared a whole lot more. Analysts said they’re expecting to hear a clearer story during the earnings call.

WMT is also said to be creating new jobs in supply chain, facilities, stores, and other facilities, which may be an indication it might be looking to more closely tie its e-commerce sales with those at brick-and-mortar. Or, that it could be looking at using its brick-and-mortar stores as pick-up and drop-off centers, a strategy we’re seeing more of across the industry.

Walmart+ Vs. Amazon Prime

There are several other new omni channel initiatives WMT leaned into in Q1 that investors might want to know about in terms of performance in Q2. The company accelerated ship-from-store capabilities, hired what Biggs called a “significant number” of personal shoppers, expanded pickup slots, and pulled out Express Delivery all in a matter of weeks in Q1.

Now WMT is pilot-testing one-day delivery through Instacart in four markets, and analysts said they’re interested in hearing what the early reception was and what might be in the office.

And what about Walmart+, the retailer’s swing at batting against Amazon Prime? AMZN claims to have 150 million Prime members worldwide—a tough hurdle to scale for WMT. But WMT has 11,500 stores throughout the world, more than any other retailer on earth. How might WMT leverage its brick-and-mortar dominance to lay a strong foundation and a competitive edge for its membership program?

Walmart+ is expected to offer much of what Amazon Prime does—same-day delivery, free delivery, exclusive savings, etc.—minus the streaming services. Will that matter to consumers?

And, let’s get on with it already—when will it launch? WMT was expected to begin marketing the Walmart+ perk this spring at $98 a year, according to tech news site Recode, but the pandemic put the brakes on that. The company has not given any indication of when the launch might be except to say “Walmart+ is almost here” on its dedicated website.

If the $98 per year price tag is accurate, it’s $20 below the running cost of Amazon Prime, now at $119. Will users view Prime content as worth the extra $20 a year? And will they see the two platforms as interchangeable in other ways? This will certainly be one to watch.

This and other initiatives might offer promise as WMT continues its competitive battles against AMZN and its legacy competitors in the big-box retail and grocery arenas. Stay tuned to how Q2 turned out and what’s ahead.

WMT Earnings and Options Activity

When Walmart releases earnings before the bell Tuesday, it’s expected to report adjusted EPS of $1.25, vs. $1.27 in the prior-year quarter, according to third-party consensus analyst estimates. Revenue is projected at $135.37 billion, up 3.8% from a year ago.

Options traders have priced in a 3.6 stock move in either direction around the coming earnings release, according to the Market Maker Move™ indicator on the thinkorswim® platform.

Looking at the August 21 expiration, put options have been active at the 125 and 130 strikes, but the highest concentration has been to the upside, at the 140 strike. Implied volatility was at the 27th percentile as of Monday morning. 

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation, to sell the underlying security at a predetermined price over a set period of time.

TD Ameritrade® commentary for educational purposes only. Member SIPC. Options involve risks and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options.

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