Walmart At Record Highs Ahead of Earnings

The budget retailer is expected to still do well in the inflationary environment, but analysts increasingly worry that growth will be sustainable.

A Long Shot to Beat Last Quarter Performance

Walmart has had a strong year so far, and last quarter was particularly good, allowing it to raise guidance (which means the chances of a further upgrade this time around are lower). But it wasn't enough to enthuse investors, who punished the company with a share price drop immediately after the earnings release. This time around, analysts are less optimistic. The company might have a tough bar to reach compared to the last quarter, but the consensus is that performance will be lower for the coming results.

The average of forecasts sees Q3 earnings for Walmart falling over 19% from the last quarter to hit a level on par with last year's number at $1.43. This is despite expectations that sales will have increased to $156.8B. Of course, the third quarter typically has a bit of a retracement since it doesn't benefit from the summer back-to-school sales and the winter holiday sales. However, the drop in profitability came despite the company seeing an increase in its gross margin last quarter and reporting positive developments in inventory. The CEO, Dough McMillan, was particularly optimistic about the second half of the year, and it could be that a bigger rebound could be expected in the final quarter.

Outlook Not So Certain Despite Positive Consensus

McMillan also touched on an issue investors could be more curious about: the rise in general merchandise sales. The cost-of-living crunch left people focusing more on groceries with smaller margins. But consumer demand lately has been fueled by increasing amounts of debt, which means Walmart might not see sustainable growth in its non-food items that would support a rebound in profitability.

The other aspect that investors might be extra interested in is the comparison between online sales and traditional channels. While Walmart has touted the growth of its online offerings, the brick-and-mortar stores have been suffering. However, despite the slow growth in physical store sales, the consensus of analysts for Walmart remains positive, with the vast majority ranking the stock as a buy ahead of the earnings release.

Broadening Wedge Points to New Records

Walmart hit a record high of $169 on Tuesday, but what is more interesting is the broadening pattern starting at $136. With two peaks and two troughs in, the third peak points to at least $172, as each successive trough must be larger than the previous one -i.e. the minimum projection is the length of the second trough. However, while discovering new prices, the next levels to consider are round levels, with the $200 being a major resistance. If bulls fail to hold the $158 line in case of a pullback, things may turn for the worse, exposing $152 next (only a break below would invalidate the broadening wedge). Short-term support at $163 and $160 would have to give way to bearish action first.

Source: SpreadEx / Walmart

Walmart is expected to perform well in the current environment, but analysts are concerned about its sustainable growth but still view Walmart's stock positively. Despite a strong year and positive earnings guidance, analysts predict that Walmart's Q3 earnings will fall by over 19% compared to the previous quarter. The CEO remains optimistic about the second half of the year, but there are concerns about the rise in general merchandise sales driven by increasing debt. Additionally, while Walmart has seen growth in its online offerings, brick-and-mortar store sales have been slow.