Wal­mart an­a­lysts to eye Flip­kart, e-com­merce at in­vestor day

Gulf Times Business - - BUSINESS -

Wal­mart Inc’s in­vestor day top­ics are likely to in­clude up­dates on the Flip­kart ac­qui­si­tion, se­lect guid­ance met­rics, the re­tailer’s e-com­merce, Fresh, and in­ter­na­tional strate­gies. In ad­di­tion, man­age­ment will get a shot at eas­ing in­vestor con­cerns about wage pres­sures and Chi­nese tar­iffs at the 2018 Meet­ing for the In­vest­ment Com­mu­nity in Ben­tonville, Arkansas on Tues­day.

Shares of the re­tail be­he­moth have been on a re­cov­ery path for most of the year af­ter fall­ing more than 10% the day of fourth quar­ter earn­ings in Fe­bru­ary. Wal­mart has since pared losses to less than 4%, and will have an­other chance to bol­ster in­vestor en­thu­si­asm next week.

This year’s in­vestor day should be pos­i­tive, given Wal­mart’s solid re­sults from the first half of the year and a fa­vor­able macro en­vi­ron­ment, ac­cord­ing to one Wal­mart bull. Telsey Ad­vi­sory Group an­a­lyst Joseph Feldman ex­pects the re­tailer to pro­vide clar­ity on key top­ics like wages, tar­iffs and its re­cent Flip­kart ac­qui­si­tion, which is ex­pected to post losses.

“We ex­pect an up­date on the com­pany’s ex­po­sure to China and the im­pact of the 10% tar­iff and ex­pected jump to 25% in 2019,” Feldman wrote in a note. “We also an­tic­i­pate a dis­cus­sion of ris­ing labour costs, es­pe­cially in light of Ama­zon’s re­cent in­crease in its min­i­mum hourly wages to $15, start­ing on 1.”

“In our view, this as­set should pay off over time as In­dian e-com­merce de­vel­ops, al­though like most e-com­merce com­pa­nies, this should drag re­sults in the near-term,” Feldman wrote. Wal­mart is rated an out­per­form at Telsey, with a price tar­get of $107.

Here’s what other Wall Street an­a­lysts are say­ing about the in­vestor con­fer­ence.

Chen sees Wal­mart fo­cus­ing on its e-com­merce growth and mar­gin man­age­ment dur­ing the in­vestor pre­sen­ta­tion.

“We fore­cast de­bates on trade-offs be­tween share gains vs prof­itabil­ity,” writes Chen in a note. Chen rates Wal­mart out­per­form with a $115 price tar­get that matches the Street high.

Wal­mart shares are trad­ing at 20 times earn­ings ver­sus their three-year av­er­age of 16.8 times, which im­plies in­vestor day up­side could be muted, Chen wrote.

“With the Wal­mart US busi­ness on solid foot­ing,” led by ef­forts in stores and e-com­merce, Dr­bul ex­pects “em­pha­sis to be placed on the In­ter­na­tional strat­egy, namely Flip­kart.”

Wal­mart’s US e-com­merce strat­egy will prob­a­bly in­clude smaller bolt-on ac­qui­si­tions, “with the aim of ex­pand­ing cat­e­gory and con­sumer de­mo­graphic reach.” In­vestors shouldn’t ex­pect an up­date on loss fig­ures in the US e-com busi­ness. On the in­ter­na­tional front, Dr­bul ex­pects Flip­kart (and the In­dia strat­egy) to get most of the at­ten­tion, but he doesn’t ex­pect up­dated fi­nan­cial guid­ance re­lated to the deal “be­yond what has al­ready been pro­vided.”

Wal­mart is rated buy at Guggen­heim, with a price tar­get of $110.

Wal­mart may up­date guid­ance now that the Flip­kart deal has closed, with the cur­rent fore­cast, which does not in­clude Flip­kart, call­ing for adj. EPS of $4.90-$5.05. In May, Wal­mart ini­tially called for deal di­lu­tion of $0.25 to $0.30 per share, as­sum­ing the deal closed in the sec­ond-half of the year.

Ad­di­tional meet­ing top­ics likely will in­clude the re­tailer’s “con­tin­ued ef­forts and progress in fresh, up­dates on price in­vest­ments, and con­tin­ued ar­chi­tec­ture and ca­pa­bil­i­ties of omni- chan­nel.” Wal­mart is ex­pected to stand by its com­mit­ment to “ev­ery­day sharp pric­ing in stores and on­line” as Tar­get Corp fo­cuses on ba­sics and as the mar­ket faces more in­fla­tion.

Schick believes Wal­mart’s ef­forts in fresh (adding back team lead po­si­tions into stores, part­ner­ing with ven­dors who move fresh prod­uct through sup­ply chain more quickly) are bear­ing fruit, with Fresh see­ing share gains vs. tra­di­tional gro­cers.

Re­gard­ing omni- chan­nel ca­pa­bil­i­ties, in­vestors may ask about progress to­ward e- com­merce sales growth guid­ance of 40% year- over-year this year, as well as e- com­merce growth around the hol­i­day sea­son.

Key points of the meet­ing are likely to cen­tre on an ini­tial FY 2020 (year ended Jan­uary 2020) fore­cast and capex plan; US e-com­merce losses; US gro­cery; wages; tar­iffs; freight& trans­porta­tion costs; phar­macy; WMT In­ter­na­tional; and Sam’s Club.

Ba­nia believes Wal­mart will re­it­er­ate its cur­rent year fore­cast, al­beit re­flect­ing the ex­pected neg­a­tive earn­ings im­pact from Flip­kart.

In­vestors seem “over­whelm­ingly” skep­ti­cal that this year will be the peak year for US e-com­merce losses. “Any com­men­tary that US e-com­merce losses are, in fact, ex­pected to sta­bilise/pos­si­bly im­prove could be a pos­i­tive for the stock,” Ba­nia believes.

Wages com­men­tary will also be of in­ter­est fol­low­ing Ama­zon’s re­cent an­nounce­ment to raise en­try-level wages to $15 per hour, as well as Tar­get’s com­mit­ment to rais­ing en­try-level wages to $15.

This is a po­ten­tial risk to the earn­ings out­look, as Wal­mart’s en­try-level wages were last in­creased to $11 an hour in Fe­bru­ary. How­ever, Ba­nia believes Wal­mart is “one of the best po­si­tioned to weather wage pres­sure amongst US re­tail peers”, due in part to its tech­nol­ogy in­vest­ments that cut the amount of labour.

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