Walmart to Record Highs, But Can It Last?

The largest retailer in the world has seen its stock price hit a record high recently as the US consumer is seen stronger than expected, but will it last?

What Inflation?

When Walmart reported its earnings last quarter, it saw an increase in sales of 7.7%, which was above the annual inflation rate at that time of 5.0%. In real terms, despite consumers being squeezed by higher prices, Walmart grew profits by 2.7% in the first quarter. The hope for investors is that with the US consumers being surprisingly resilient over the last quarter, Walmart will manage to increase sales above inflation once again. Although, with inflation coming down, a smaller number might imply a larger real increase in sales for the company, a fact that could throw off some traders initially.

But the headline doesn't paint the whole picture. Consumer trends in the US have been shifting, as certain items continue to rise in price while others fall. Groceries - the mainstay of stores like Walmart - have continued to rise despite the lowering inflation. On the other hand, groceries represent a smaller margin for Walmart, and increased spending on home appliances might have a bigger impact on the bottom line.

What to Look Out For

The consensus among analysts is that Walmart's Q2 earnings will see a significant increase quarterly but will be lower compared to the prior year, at $1.67. Revenues are expected to advance to $159.3B, with a focus on margins, as budget-conscious Americans continue to focus on groceries over other items that offer better margins. Walmart forecasts earnings of $1.63-1.68, with Revenue increasing by 4.0% (implying $159.0B). The company raised its guidance for sales at its last earnings release but cut its adjusted EPS outlook as it faces margin pressure.

Supply chains have been a problem for Walmart as it struggles with higher input costs. Although that is a problem across the industry, as the largest retailer with over 11K stores, issues with logistics can have an outsized impact on Walmart. Thus, commentary on potential solutions to supply chains and what to do about labour costs will likely get extra investor attention. Inventory normalization has also been an issue for a while, as high inventory levels have pushed the company to cut margins on some of the more pricey items to move merchandise.

Walmart in Wedge, But Did it Compete?

Despite hitting an all-time high at $162.30 last week, the structure of Walmart’s price appears to overlap, increasing the chances of a terminal wedge pattern. In wedges, each successive peak must be shorted than its preceding, pointing to a maximum target of $168 (the third peak would be the same length as the second peak) before a pullback or a reversal could be seen. If the $153 trough gives way to bears, however, losing $145 would increase speculation for further drops towards $136. Conversely, if the regional low at $158 manages to repel bears, the share price could accelerate to new records in the immediate aftermath of a takeover of the current high.

Source: SpreadEx / WALMART

Key Takeaways

Walmart's stock price has been doing well due to a stronger-than-expected US consumer, but there are concerns about whether this will continue. Despite inflation, Walmart saw an increase in sales and profits last quarter. However, consumer trends have been shifting, with groceries continuing to rise in price while other items fall. Analysts expect Walmart's Q2 earnings to increase quarterly but be lower compared to the prior year, with a focus on margins. Supply chain issues and labour costs are also areas of concern for investors.