A Preview Of Wal-Mart's Q4 Results: Beware Of Flow-Through Concerns

Wal-Mart Stores Inc WMT is set to report its fourth-quarter results on February 21. Deutsche Bank believes Wal-Mart will be one of the few retailers to report 4Q within its original guidance range. But, the brokerage also warned of flow-through concerns.

Analyst Paul Trussell, who has a Hold rating Wal-Mart shares, cut his fourth-quarter EPS estimate to $1.26 (from $1.30), which came in toward the middle of $1.18–$1.33 guidance and a tad below the Street at $1.29.

Analyst's Take

The analyst also trimmed his fourth-quarter SSS view to 1.1 percent from 1.4 percent versus Street’s 1.2 percent and guidance of 1–1.5 percent, reflecting grocery consistency partly offset by a tough backdrop related to discretionary holiday sales.

That said, Trussell expects Wal-Mart to report positive U.S. traffic for the ninth straight quarter as its sales improving initiatives are gaining traction.

“The combination of improved in-stocks, grocery pick-up, a “fresher” fresh dept., multiple e-commerce platforms, and a better trained, paid, and empowered workforce has led WMT to an average U.S. comp of 1.3 percent over the past eight quarters despite SNAP and deflation headwinds,” Trussell wrote in a note.

However, dollar stores are taking some share from Wal-Mart as rising gas prices tend to lead to consumers to shop closer to homes.

Related Link: Wal-Mart CEO Issues 3 Predictions For The Future Of Retail

As such, Trussell expects 55 bps EBIT margin compression to 5.1 percent, with 7 bps gross margin expansion and 68 bps SG&A deleverage, largely in the United States.

“The lack of flow-through, however, is what has kept the stock sideways, in our view, and we see no EPS growth in 2017 as the pace of investments in price and e-commerce continues,” Trussell added.

Shares of Wal-Mart closed Thursday’s trading at $68.87. The analyst cut his price target by $1 to $71.