The COVID-19 pandemic was a game-changer for many companies, for better or worse. Though Walmart seems to have fared well from a sales standpoint—on grocery items and other necessities anyway—sales of non-discretionary items, and a possible rise in costs could be a counterbalance.
Few retailers might be able to write the history book on navigating the coronavirus pandemic as well as Walmart (WMT). The first chapter has already been written and investors will get to see it when the nation’s largest retailer opens its first quarter books this week.
It’s a multi-themed book, for sure, and investors might expect the ups and downs of any business thriller. Here’s a sampling of possible themes when WMT releases earnings Tuesday morning.
And that’s just the high-level snapshot. The devil in those nitty-gritty details will likely tell the real tale of how WMT struggled to keep the homes of the masses well stocked during the passage of time under stay-at-home orders. It started with food, toilet paper, and hand sanitizer disappearing from the shelves and moved to purchases of puzzles and games to hair clippers and hair dye.
"You can definitely see that as people have stayed home, their focus shifted," Walmart Chief Executive Doug McMillon said on the Today Show in April.
In the COVID-19 world, most retailers have been hard hit by the pandemic see figure 1 below). But WMT was not one of them. Taking status as an “essential retailer,” mostly because of its food and personal-use merchandise, WMT looked like a champ in another virtual horse race.
FIGURE: OUTPACING. As a whole, the S&P Retail Select Industry Index ($SPSIRE—candlestick) took it on the chin in early 2020, but shares of Walmart (WMT—purple line) more than held their own. Data sources: NYSE, S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
As of May 17, WMT shares are up 6% since the beginning of the year, but remember it didn’t take the deep double-digit drop that many others did in mid-March. But it could still.
Expectations seem to be high ahead of WMT’s Q1 results because the big-box retailer has been a lifeline for many consumers, and has appeared to have lassoed market share from smaller competitors that couldn’t or wouldn’t stay open during the shelter-at-home mandates.
Even with grocery, alcohol, and personal-care sales on fire, were they enough to offset lost sales on home goods, and spring apparel and footwear, for example? In other words, how did the nondiscretionary vs. discretionary sales score?
BMO analyst Kelly Bania, for one, thinks sales of things-we-don’t-need-now were a big loser. “Despite an outlook for higher grocery sales, we lowered our [2021 earnings estimates] given an outlook for weaker discretionary comps,” she wrote in a recent note.
Other analysts have posited similar thoughts, but there’s no clear evidence either way.
How did WMT change with the times? Investors are likely wanting to hear how McMillon and crew crafted and fine-tuned the process with each passing day of quarantines and the slow but sure reopenings of city and states. What did that cost?
While WMT has offered few financial details on how the pandemic purchasing power played out, the Wall Street Journal estimated that sales at the 4,700 U.S. stores vaulted nearly 20% in March. Over a three-month period, that’s huge by almost any standard.
As we learned from Amazon’s (AMZN) earnings last month, those sales and everything that goes into keeping warehouses and shelves stocked, delivery trucks running, culling high-demand products, and staving off the virus from employees and customers alike come with a hefty price tag.
We have yet to see the keeping-up-with-the-pandemic capital expenditure line items on everything but the costs of rewarding employees. WMT said last week it was writing checks totaling $350 million for another special cash bonus for employees to recognize them for their contributions.
That thank-you pay won’t be on the books for the first quarter, nor will the $365 million special cash bonus WMT promised in mid-March because it wasn’t paid out until April 2. But it will be in Q2 as well as a pile of money spent that might not be in Q1 results.
As we’ve said before about retail earnings overall, the looking-ahead part is going to be tricky—and we’ve seen that played out with AMZN and some others. Like many other corporations, WMT is not likely to offer any guidance because the uncertainty of what lies ahead kills any sense of credibility.
But analysts could be asking for dollar figures on bonuses, the new sanitation and cleaning measures, ramping up deliveries and accelerating at-home and curbside delivery options, for example.
There’s also the incidental cost of the public-private partnership pushed by the White House to set up COVID-19 testing sites throughout the country. WMT helped identify and construct the sites that are manned by Health and Human Services department employees, but WMT has a staffing cost too with its pharmacists onsite. What kind of costs might be attached to these sites, and how long might WMT expect to carry those costs? And are other, similar initiatives on the horizon?
Remember, too, though WMT has been through some heady times with lost sales and unexpected costs, coronavirus isn’t like a hurricane that rips in and out of certain geographical boundaries, leaving a path of destruction that’s still heartbreaking but fixable.
When results are released Tuesday morning, WMT is expected to report adjusted EPS of $1.12, down a penny from the prior-year quarter, according to third-party consensus analyst estimates. Revenue is projected at $130.31 billion, up about 5% from a year ago.
The options market has priced in an expected share price move of 4.6% in either direction around the earnings release, according to the Market Maker Move™ indicator on the thinkorswim® platform.
Looking at the May 22 expiration, put activity has been light overall, but heaviest at the 120 strike. Calls have seen more activity, with concentrations at the 130 and 135 strikes. The implied volatility sits at the 35th percentile as of Monday morning.
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.
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