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Will Wal-Mart (WMT) Miss Q3 Earnings on Higher Costs?

Zacks Equity Research

Wal-Mart Stores Inc. (WMT) is set to report third-quarter fiscal 2015 results, before the opening bell on Nov 13. Last quarter, this retail giant posted in-line results. Let’s see how things are shaping up prior to the announcement.

Factors to Consider

Though the company delivered in-line earnings and better-than-expected revenues in the second quarter of fiscal 2015 after reporting five weak quarters in a row, it is still showing signs of acute weakness.

For the third quarter of fiscal 2015, Walmart expects adjusted earnings to range between $1.10 and $1.20 per share, as against $1.14 per share reported in the last year quarter. U.S. comp sales are expected to be relatively flat for the 13-week period ending Oct 31 as against a decline of 0.3% last year. Sam’s Club comp sales, without the impact of fuel sales, are expected to be slightly positive compared to a 1.1% increase last year. The company expects third quarter tax rate to be around 34%.

A challenging retail environment in the U.S. as well as in most international markets due to cautious consumer spending has been hurting the company's top line. Currency fluctuations are also reducing sales. The company's U.S. comparable store sales have been sluggish over the last six quarters as a result of weak spending by lower- and middle-income segment consumers. Middle-class consumers are still struggling to cope with stagnant wages and reduced food stamp benefits.

Medical cost inflation and increased health care enrollments in the U.S. during the second quarter of fiscal 2015 have also increased health care costs of the company. In view of rising health care costs, the world's largest retailer announced last month that it would increase the health insurance premiums for its U.S. employees. Also, the retailer plans to eliminate health insurance coverage for some of its part-time U.S. workers. (Read: Walmart Cuts Health Insurance Benefits; Raises Premium).

Also, in order to compete with other online retailers like Amazon.com, Inc. (AMZN), the company has been focusing on making huge investments in the e-commerce business, which will in turn lower profit margin in the upcoming quarters owing to shipping costs and price competition involved in it.

To add to the woes, during the second-quarter fiscal 2015 conference call, the company lowered its fiscal 2015 earnings guidance in anticipation of higher health costs and increased online investment. In mid-October, the company also slashed its fiscal 2015 sales outlook amid a tough economy. (Read: Wal-Mart Cuts Sales View, Investing More in E-Commerce). The Zacks Consensus Estimate for the third quarter and fiscal 2015 has also declined over the past 30 days.

Earnings Whispers?

Our proven model does not conclusively show that Walmart is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1, 2 or 3 for this to happen. That is not the case here as you will see below.

Negative Zacks ESP:The ESP for Walmart is -0.89% as the Most Accurate estimate of $1.11 per share is lower than the Zacks Consensus Estimate of $1.12 per share.

Zacks Rank #3 (Hold): Walmart’s Zacks Rank #3 when combined with a negative ESP makes surprise prediction difficult.

We caution against stocks with Zacks Ranks #4 and #5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

Stocks to Consider

Stocks in the retail sector that have both a positive Earnings ESP and a favorable Zacks Rank and are therefore worth considering include:

Zumiez Inc. (ZUMZ) with an Earnings ESP of +3.85% and a Zacks Rank #2 (Buy).

The Kroger Co. (KR) with an Earnings ESP of +3.28% and a Zacks Rank #2. 

Read the Full Research Report on WMT
Read the Full Research Report on KR
Read the Full Research Report on AMZN
Read the Full Research Report on ZUMZ


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