Wal-Mart Earnings Preview: Grocery, ShippingPass, And Wal-Mart Pay


We think the grocery business put up good numbers throughout the quarter, helped by a QSR slowdown.

The widespread expansion of ShippingPass caused WMT’s online traffic to spike in July.


A nationwide rollout of WMT Pay likely helped brick-and-mortar traffic.

Valuation remains a concern.

Wal-Mart (NYSE:WMT) announces Q2 earnings on Thursday, 8/18, and we think the numbers will be quite good. Our research indicates that the grocery business put up strong numbers throughout the quarter while ShippingPass boosted e-commerce results in July and WMT Pay improved brick-and-mortar traffic.

We think WMT’s grocery business had a very strong quarter. Last quarter, the company put an emphasis on expanding its grocery business. Management said the Grocery Pickup service would be available in 40 markets by the end of May (versus 22 at the start of the year) and that expansion only continued throughout the quarter.

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Concurrently, there was a massive slowdown in the QSR space this past quarter. We discussed this in our article about Kroger (NYSE:KR), and the short of it is that QSR prices are inflating while grocery prices are deflating, and this discrepancy is causing consumers to choose dining-in over eating out. Simply look at how comps decelerated at different QSR chains this past quarter to see evidence of this:

McDonald’s (NYSE:MCD): +6.2% to +3.1%
Taco Bell (NYSE:YUM): +1% to -1%
Wendy’s (NASDAQ:WEN): +3.6% to +0.4%
Noodles (NASDAQ:NDLS): Flat to -0.9%
Sonic (NASDAQ:SONC): +6.5% to +2%
Burger King (NYSE:QSR): +4.6% to +0.6%
Tim Hortons: +5.6% to +2.7%

Interestingly, though, this shift of traffic did not show up in premium grocers’ numbers. Whole Foods (NASDAQ:WFM) and Sprouts (NASDAQ:SFM) both saw traffic slow in the quarter, and we take this to mean that the consumer is shifting specifically from QSR to discount grocers. We think WMT’s grocery business was a big beneficiary of the QSR slowdown last quarter.

Beyond grocery, we think e-commerce got a much needed boost in July from the widespread expansion of Shipping Pass. On the onset, we argued that significant overlap in Netflix (NASDAQ:NFLX) and Amazon (NASDAQ:AMZN) Prime’s user base implied tremendous opportunity for Shipping Pass. Early reception seems to confirm this, as SimilarWeb, Alexa, and Google (NASDAQ:GOOG) Trends all indicate strong online traffic growth for WMT during the month of July. Specifically, search interest related to Shipping Pass spiked over the past 3 months.

On the bricks front, we think WMT got a nice boost from the expansion of WMT Pay. On the Q1 call, management said that they began a nationwide rollout of WMT Pay in late April / early May and expected to complete the rollout by the end of June. Management largely executed on that, and WMT Pay was available in more than 4,600 stores nationwide as of early July. It looks like consumers are responding positively to WMT Pay. Management said transactions through WMT Pay increased 45% in the last week of June and that monthly active users jumped to over 20 million. That means essentially all of WMT App users have adopted WMT Pay, an impressive adoption rate over such a short time. We believe the convenience of WMT Pay, along with additional perks such as the Savings Catcher, helped drive strong traffic through WMT’s brick-and-mortar locations throughout the quarter.

While we think the company had a good quarter overall, we are tempered by a few headwinds that could affect our thesis. Throughout the quarter, WMT has had its fair share of troubles with Visa (NYSE:V) in Canada, and on July 18, WMT actually stopped accepting Visa cards at 3 stores in Ontario. This likely had minimal impact on the quarter, but WMT is threatening to cut Visa off entirely from its Canadian operations. That could be hugely detrimental to the future business, as Visa is the largest payments network in Canada with 50.6 million cards in circulation. Moreover, AMZN reported quite strong retail growth this past quarter, and this coupled with a surprising bounce-back from Macy’s (NYSE:M), Kohl’s (NYSE:KSS), J.C. Penney (NYSE:JCP), and Nordstrom (NYSE:JWN) leaves us concerned as to how much money consumers doled out at WMT on apparel. WMT, though, only gets 8% of its sales from apparel, so we believe risk from poor apparel sales is mitigated by low exposure.

Overall, we think the quarter was quite strong. The stock doesn’t sport a terribly attractive valuation at 16.7x forward earnings on pedestrian low-to-mid single digit earnings growth, but the EBITDA multiple is more-or-less in-line with where it has been over the past 5 years. We remain cautious on the valuation, but do think the company had a good quarter with growth coming in critical areas.

Fuente: Seeking Alpha

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