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WMT’s Purchase of Jet.com Likely Focus on Conference Call

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August 17, 2016
Wal-Mart (WMT) reports earning declines for Q2 stock market results.

When Wal-Mart Stores (WMT) reports Q2 earnings ahead of the market open on Thursday, analysts and investors already will be braced for a decline in profit amid top-line sales that are expected to be relatively flat compared to last year. What they’ll really want to know about is the e-commerce strategy of the world’s largest retailer.

That’s important in its own right, given the stiff and growing competition brick-and-mortar retailers face regularly with Amazon (AMZN). WMT analysts say they want to hear more color behind the recent announcement that WMT purchased Jet.com, which promotes itself as a lower-priced alternative to AMZN, for $3.3 billion.

The cash-and-stock deal is an attempt to help WMT grow its e-commerce site, the company said in a press release. WMT’s online business generates about $14 billion in sales, large by most accounts but still much smaller than AMZN’s $100 billion enterprise.

"We're looking for ways to lower prices, broaden our assortment and offer the simplest, easiest shopping experience because that's what our customers want," Chief Executive Doug McMillon, said in the release. "We believe the acquisition of Jet accelerates our progress across these priorities.

“Walmart.com will grow faster, the seamless shopping experience we're pursuing will happen quicker, and we'll enable the Jet brand to be even more successful in a shorter period of time,” he added. “Our customers will win. It's another jolt of entrepreneurial spirit being injected into Walmart.”

But analysts say they want to know how WMT will integrate and position the business into its e-commerce platform even though the company said the two brands would stay distinct. Will the acquisition be accretive to or sap earnings? If a drain, what’s the timeline for profitability? How does WMT see itself competing against AMZN with this purchase? How quickly can it ramp up staff, cut overlap and integrate cultures, something some analysts suggest might be challenging given the startup’s looser ethos?

Beyond that, analysts also want to know how WMT is dealing with its self-imposed rising labor costs. Last year, WMT upped its hourly wage to $10 an hour from $9 and instituted new training, moves its chief financial officer warned investors would subtract some $1.5 billion from profits this year. Do those projections still hold?

Executives have said that Q2 same-store sales, a key growth measure in the retail industry, would rise for the eighth straight quarter, at around 1%. Are the store improvements paying off?

At Thomson Reuters, the analyst consensus stands at $1.02 per-share profit, down roughly 6% from year-ago earnings. Revenues are projected to be flat, coming in at $120.37 billion from $120.22 billion last year.

Short-term options traders have priced in a 3% potential share price move in either direction around the earnings release, according to the Market Maker Move™ indicator on the thinkorswim® platform by TD Ameritrade.

There’s been active in the options market at the 75-strike calls and the 70-strike puts. The implied volatility is at the 31st percentile. (Please remember past performance is no guarantee of future results.)

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.

FIGURE 1: HOLDING PATTERN IN WMT.

Since the end of June, WMT shares have had a tough time trading out of the $72-$73 range during a period when the major benchmarks are reaching fresh record highs. Data source: Standard & Poor’s. Image source: the thinkorswim® platform by TD Ameritrade. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

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