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Earnings: How’s the Consumer Faring? WMT, BBY Report Thurs

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November 16, 2016
Electronics Shopping: WMY, BBY Q3 Earnings

Investors will get another look at how consumers may be spending their hard-earned dollars when two big-box retailers, Wal-Mart (WMT) and Best Buy (BBY), release their Q3 results and offer their perspectives and outlooks on the sector before the markets open Thursday.

Their accounts will come after robust Q2 results from both firms, and after mostly upbeat Q3 reports from a handful of other retailers this week. Plus, the Commerce Department said Tuesday that October retail sales climbed 0.8% from September, logging the best two-month performance in two years, even after a September revision.   

How is WMT Battling Margin Pressures?

Analysts are mostly upbeat about WMT’s expected earnings, thanks in part to comments and results from the world’s largest retailer in the prior quarter. WMT turned in Q2 earnings that beat Wall Street’s expectations amid solid same-store sales results, and at the time raised its full-year earnings guidance.

Sales at stores open longer than a year, an industry benchmark often referred to as comparable-store sales, or “comps,” rose 1.6% company-wide, beating Wall Street’s forecast for a 1% gain. WMT said then that, for Q3, it was expecting same-store sales at U.S. units, its biggest segment, to turn higher by 1.5%.

“Our strategy in the U.S. is working as we delivered an eighth consecutive quarter of positive comps, and international also performed well,” Chief Executive Doug McMillon said in the Q2 press release.

WMT has invested billions of dollars in the last two years to step-up its food offerings and its e-commerce arm, and to raise its workers’ wages. On the Q2 conference call, executives said they were mostly pleased with the results, despite headwinds from lower food prices in the grocery aisles, which impacted margins. These headwinds, they said, were partially offset by cheaper gas prices and warmer weather—two factors that may not be sustainable on a long-term basis.  

What are analysts listening for on the conference call? Though lower margins have pressured earnings per share for six straight quarters, WMT has managed to outpace Wall Street’s estimates in the last four of them. Analysts say they are looking for more insight into how the retail giant expects to combat margin pressure, especially given the outlook that food prices may stay lower.  

They say they’re also looking for more information on how WMT plans to integrate e-commerce company Jet.com, which it agreed to acquire in August of this year. That, and other online investments, may help WMT go head-to-head against Amazon (AMZN), the world’s largest e-commerce retailer and a major competitor of WMT.

At Thomson Reuters, analysts are forecasting, on average, earnings of $0.96 a share, down nearly 7% from the year-ago profit of $1.03. Revenue is projected to edge higher by 1% to $118.59 billion from $117.41 last year.

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

Call option activity has been higher at the Nov 71-strike and the Nov 72.5-strike; puts have been active at the Nov 70-strike. The implied volatility is at the 43rd 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. 

WMT, 12m, 2015-16

FIGURE 1: STEADY CLIMB.

WMT shares have tread in a relatively sturdy manner amid a rocky market over the past year, and are up nearly 27% since a year ago. Chart source: thinkorswim® by TD Ameritrade.  Data source: Standard & Poor’s. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

How Were BBY’s E-Commerce Sales in Q3?

BBY has had a robust string of quarters as sales declines have eased and profits have shifted back into growth mode under Chief Executive Hubert Joly. Will Q3 be a repeat of those previous quarters?

BBY has managed to generate higher profits amid slumping sales, thanks in part to cost cutting, better spending controls and higher margins from e-commerce sales, which have grown by double-digits in recent quarters. In its most recent quarter, a 24% jump in domestic online sales came after a 23% online advance the quarter before, which gave the company enough confidence to boost its full-year earnings forecast.

“Our teams delivered a strong second quarter, with better-than-expected revenue and profitability in both our domestic and international businesses,” Joly said in the Q2 press release, adding that U.S. same-store sales rose 0.8%, above flat guidance, on top of a 3.8% comparable-store sales increase the year before.

“We saw continued positive momentum in our online sales—delivering a second straight quarter of nearly 24% growth,” he added. “We also continued to deliver cost savings and drive efficiencies in the business, a discipline that is critical to our ability to invest in our future.”

In this quarter’s results and conference call, analysts say they’ll be looking for some insight into what BBY, like other retailers, might see for the upcoming holiday selling-season, the busiest and generally most lucrative for retailers. BBY released its promotional deals for Black Friday, which include discounts and perks—and new colors—for Samsung’s Galaxy S7 and Galaxy S7 Edge (which should not be confused with the recalled Galaxy 7 Note phones), as well as Apple’s iPhone 7, released in September.

Speaking of Samsung, analysts also say they are looking for an update on BBY’s partnership with the electronics maker. BBY has opened Samsung mini shops in its stores over the last three years as part of a move to showcase Samsung’s latest products. Given the recall issues Samsung has faced this year, analysts want to know what impact, if any, that is having on BBY’s sales. Over half of all BBY merchandise sales are gleaned from a combination of Samsung, Apple, Sony and LG Electronics products, according to the company.

On average, analysts polled by Thomson Reuters are expecting a per-share profit of $0.47, up 14.6% from last year’s earnings of $0.41 a share. Revenue is projected to be flat at $8.8 billion.

Short-term options traders have priced in a potential share price move of 8.5% in either direction around the earnings release, according to the Market Maker Move™.

Call options have been active at the 40- and 41-strike prices while puts have seen activity at the 38-strike. The implied volatility is relatively high at the 70th percentile. (Please remember past performance is no guarantee of future results.)

BBY, 12m, 2015-16

FIGURE 1: RANGE BOUND AFTER Q2 JUMP.

After beating Wall Street’s Q2 expectations in August, BBY shares jumped more than 21% and have been trading in a tight range since then. Chart source: thinkorswim® by TD Ameritrade.  Data source: Standard & Poor’s. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

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