Wal-Mart Spikes On Great Earnings
Wal-Mart is no longer a growth stock which can keep up with the returns from the FAANG names. However, it is always worth reviewing its earnings report. It's a great barometer for the health of the consumer since it is the biggest retailer in America.
The great report confirms the strong July retail sales report I reviewed in my previous article. Adjusted EPS was $1.29 which beat estimates for $1.22. Revenue was $128.03 billion which beat estimates for $125.97 billion. Same store sales in America were up 4.5% which beat estimates for 2.4% growth. Q2 same store sales growth was the highest in over 10 years.
Online retail sales were up 40%. Growth was boosted by the website redesign and the addition of grocery delivery options. Wal-Mart expects 40% growth for the whole year. It is certainly taking share from rivals as it utilizes its brand recognition, logistics capabilities, and wide product selection to grow sales in this previously untapped market.
Last year’s Q3 had 50% sales growth, so online sales growth has been a driver of the business for a while. The impact will be larger as growth continues, but it will decelerate as it gains scale. The company purchased the biggest online retailer in India, Flipkart, to continue this pace of torrid growth. It also signed a partnership with Lord & Taylor to bring new products to the website.
Wal-Mart comments on the tariffs are pivotal to helping us understand how they will affect S&P 500 earnings going further.
The CFO, Brett Briggs, said, “While we know questions persist about tariffs, the potential future impact is difficult to quantify. We are closely monitoring the tariff discussions and are actively working on mitigation strategies, particularly in light of potentially escalating duties." The great numbers tell us the tariffs haven’t impacted the business that much yet.
Full year estimates for EPS were revised from $4.75 to $5 to $4.90 to $5.05. Same store sales are expected to increase 3% in fiscal 2019, which is up from the expected 2% increase. As a result of these great numbers, Wal-Mart stock was up 9.31% on Thursday; it was the biggest gainer in the Dow and the S&P 500.
Wal-Mart and the Stocks Rebound On Thursday
The latest action in stocks has been volatile as stocks react to the news. The news that America and China will resume trade talks combined with the great earnings from Wal-Mart and Cisco powered the market higher. Cisco stock was up 3%. The S&P 500 overall was up 0.79% and the Russell 2000 was up 0.9%.
Since the Dow includes both Wal-Mart and Cisco, it was up 1.67%. The VIX was down 8.13% to 13.45. It appears investors are deciding if the market should make an all-time high with the way it has been going up and down, but it also might be a coincidence as a few negative and positive news events have occurred this week.
The CNN Fear and Greed index is only at 51, so a run at the January record in the next few days seems likely. The fact that the market was slightly oversold coming into the day helped power it higher. The S&P 500 needs to increase 32 more points to reach the record; this is about a 1.1% gain. The telecom sector led the market higher as it was up 2.01%.
This is unusual because the telecom sector usually does well in a ‘risk off’ trade and underperforms during ‘risk on’ action. The worst sector was tech as it was up 0.25%. This is also unusual because tech does well on ‘risk on’ days. Facebook has been underperforming lately after its post-earnings rally. It was down 2.29% on Thursday and is down 5.9% since August 6th. It is back near its recent low made on July 30th, signaling the selling from the report may not be done.
Wal-Mart imports - China U.S. Trade Talks Resume
Since the top tail risk in the Merrill Lynch survey was a possible trade war and the Chinese slowdown was third, the fact that America and China resumed trade talks is good news, especially for large importers like Wal-Mart.
However, the Reuters report said these were only low level talks which means the market may be disappointed with the result of them. The fact that the market powered this much higher on such a small news event gives us an idea of how much it would increase if there is a permanent ceasefire in the tariff battle. The S&P 500 could easily increase 5% on that news.
Boeing and Caterpillar drove the market higher as they are affected by trade growth. Their stocks increased 4.3% and 3.2% respectively. The Vanguard emerging markets index only increased 0.71%. This makes sense as the gains in America were amplified by great earnings reports.
One other part of the trade negotiations between America and China which I haven’t mentioned yet is that President Trump may want to make a deal before the mid-term elections to use as a talking point on the campaign trail.
He can spin any deal into a win for the American voters. Every politician wants to promote their victories; Trump is especially in need of one as his approval rating is 43.3% despite the strong economy. The Merrill Lynch tail risk survey showed the Democrats sweeping Congress was selected by a small percentage of fund managers.
I haven’t been focused on this election as an investor because the President will have the power to veto Democratic legislation if they win the House and the Senate. It’s still early, but the latest average of generic congressional polls says the Dems have a 6.8% lead over the GOP.
Wal-Mart and Trade - Conclusion
The hope is these talks with China quell the tariff battle because after the American tariffs on China are enacted on August 23rd, there will be more tariffs threatened. Companies like Wal-Mart may no longer be able to offer such competitive prices for goods.
These new tariffs could be massive ones which start to hurt the overall economy and not just small parts of it. August 23rd could be the de facto deadline for discussions. It would be interpreted as a bad signal by the Chinese if America implements tariffs during the discussions. If the tariffs are delayed, it’s a very good sign the discussions have been fruitful.
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