Be Realistic About the Growth Prospects For Walmart Stock

As expected Walmart (NYSE:WMT) reported exceptional earnings on August 18. Earnings per share came in at $1.56 well above consensus expectations of $1.25. The top line was a beat, but not quite as impressive. Walmart delivered $137.70 in revenue, 2.8% above the expectations for $133.77 billion.

There was no way for retailers to be ready for a global pandemic. But it’s generally accepted that Walmart was a pandemic winner. With everyday low prices, the company capitalized on consumers who received their stimulus checks in April. And to be honest, many Americans had few places to go during the pandemic.

For years, the company has been embracing the omnichannel model to be competitive with Amazon (NASDAQ:AMZN). However, it doesn’t matter why they were doing it. When the pandemic hit, Walmart had a digital architecture in place that facilitated curbside pickup and online ordering.

Now Walmart is preparing to go one step further with the launch of Walmart+. This will be a direct competitor of Amazon Prime. Analysts have lowered their expectations since the launch of Walmart+ has been delayed. And it also appears that what the company rolls out will be a scaled-back version of the service. Investors got no more clarity on a launch date on the conference call after the earnings report.

Walmart has been doing a lot of things right. But I still see three reasons why the stock may have muted performance the rest of the year.

Consumers Aren’t Panic Shopping Anymore

The novel coronavirus is likely to be with us for some time. But businesses and supply chains are starting to catch up. In late March and April, there was a lot of hoarding going on. I know that I was buying things well before I was going to need them just because I wasn’t sure if they’d be on the shelves the next time I went to the store

Everyday staples like butter, rice, and eggs could be as hard to come by as toilet paper. But that situation, thankfully, has improved. And while that doesn’t mean consumers don’t have to go to the store, it’s likely that the amount they are spending per visit will be evening out.

Back-to-School in a Virtual World

A typical end-of-summer catalyst for retailers like Walmart and Target (NYSE:TGT) comes from parents and teenagers buying back-to-school items. But that will be a bit different this year. Forbes cited a survey from FinanceBuzz that says 1 in 3 consumers are expecting to spend less this year on back-to-school items. Walmart management confirmed that the back-to-school season was off to a sluggish start.

I’m among the group of parents who have the option (for now) of sending my child for in-person learning. But many won’t have the option. And that means there’s no need to shop for new clothes or backpacks.

And back-to-school shopping also typically involves helping teachers “clean their lists” by buying facial tissues, paper towels, and other community items. Those won’t be needed in many cases.

It May Not Be a Green Christmas

The fourth quarter is typically a great revenue generator for retailers. On top of the holidays, there’s Halloween. But it’s unlikely that Halloween will look the same this year. And according to the research firm, Meredith, holiday shopping will start earlier than normal (that’s not surprising) with consumers spending less than normal.

Alysia Borsa, Meredith’s executive vice president/chief marketing and data officer, says high unemployment will be an issue. “There’s going to be a more conservative approach to spending this holiday season,” said Borsa who adds, “We’ve seen that over 50% of Meredith families are concerned about their jobs. And over a third of them have already experienced some loss of income.”

What to Expect From Walmart Stock?

If Walmart delivers on earnings per share of $1.22, the stock would be flat on a year-over-year basis. And while revenue of $134 billion would be a 10% YoY beat, it would be basically flat from the prior quarter (two of those months were pre-pandemic).

That may justify the stock breaking past $130 now, but how about for the rest of the year? Last year, in one of the most robust economies in our nation’s history, Walmart stock mustered a gain of just $2 in the fourth quarter. And if you’re thinking that was an anomaly, you should think again. With the exception of 2017, that pattern of tepid fourth-quarter growth has been the norm for the last five years.

So what am I saying? Just this. Walmart stock has not had historically strong fourth quarters and this year, it is facing a second half of the year without the usual catalysts.  This year, the economy does not look to be on nearly such a firm footing.

Will this translate to lower revenue for Walmart? It may be better to say that it’s likely that revenue will start to even out. This will be balanced somewhat by costs that are coming down as some incentive pay expires. Either way, Walmart stock does not look like a strong growth stock.