Walmart Q3 Earnings Could Offer Clues About Broader Retail Sector

Some of the largest grocers in the U.S. have had a great run so far this year. With few other ways to spend as the deadly pandemic kept consumers locked down and close to home, many overloaded their pantries as a way of avoiding additional trips to stores.

One of the primary beneficiaries of this trend: America’s largest retailer, Walmart (NYSE:WMT) whose sales—helped by its vast brick-and-mortar presence and its expanding e-commerce capabilities—surged, providing a strong boost to its top and bottom lines.

With expectations still running high, investors have already pushed WMT shares to a new record. They closed on Friday at $150.54, after gaining about 27% this year. This handily beats the S&P 500's gain of 11% over the same period as well a the 19% rise in the SPDR® S&P Retail ETF (NYSE:XRT).

But the big concern for shareholders now is how much farther can this rally run?  To begin with, there remains considerable uncertainty regarding when and whether the new administration will be able to put together a fresh round of stimulus to help sustain the U.S. economic recovery. 

Talks between Democrats and Republicans stalled over the size of the aid package ahead of the election. The divided mandate, the result of the November elections, has further complicated the negotiations when they resume.

Walmart and other retailers have emphasized the importance of such stimulus in their last earnings statements. The Bentonville, Arkansas-based mega retailer said the stimulus money helped fuel sales at both its namesake stores and its Sam’s Club chain. The company said that consumers having that money in their wallets also boosted sales in high-margin general-merchandise categories. But “as stimulus funds tapered off, sales started to normalize,” according to the retailer.

E-Commerce Push/h2

Despite the stimulus uncertainty, there are many other reasons to believe that Walmart shares are in a long-term up-trend, given the company’s advances in its crucial fight with Amazon (NASDAQ:AMZN) to win online customers. 

In the past quarter, Walmart launched its Walmart+ subscription service, offering members unlimited free home delivery of more than 160,000 items, including groceries, so long as they spend at least $35 per order. 

Tuesday’s earnings report will provide a first glimpse of whether customers are warming up to the service, which if successful can give a fresh boost to WMT sales. Even prior to this initiative, Walmart had been reaping the benefit of its massive investments in its online channels.

During the second quarter, online sales jumped 97% from a year earlier, with both pickup and delivery options notching all-time high sales volumes. This strong e-commerce expansion came in conjunction with a 27% increase in average ticket size, the total bill as people consolidated their shopping into fewer, albeit bigger, orders.  

Bottom Line/h3

After a remarkable rally this year, Walmart shares may look expensive to some investors. That concern, in our view, ignores the fact that Walmart is entering a new growth cycle after the pandemic changed the way many people shop for their daily needs.

With its e-commerce momentum and strong core brick-and-mortar operations, Walmart is well-positioned to benefit from this shift, which means its stock has more room to run.