Wal-Mart Earnings Preview: Is A Disaster Looming?

Wal-Mart (NYSE: WMT) will report its second quarter results before Thursday's market open.

Wal-Mart last reported its results on May 15. The retailer earned $1.10 per share, $0.05 less than analysts expected. Revenue of $114.9 billion fell short of expectations by nearly $1.4 billion.

Wal-Mart noted that poor weather in the quarter lowered its EPS by $0.03. At the same time comparable-store sales growth in the United States was flat. Inventory issues arose as inventory growth of 5 percent outpaced the rate the company grew sales by 430 basis points.

Traffic issues were also brought into focus, as traffic fell 1.4 percent in the United States. Wal-Mart guided its second quarter earnings to be in a range of $1.15 to $2.15, which at the time fell short of the consensus estimate of $1.28.

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Following Wal-Mart's results, Brian Sozzi of Belus Capital Advisers noted that the company has problems getting people into U.S. stores in non-holiday periods. This should alarm shareholders, as Wal-Mart continues to heavily invest in their prices.

Developments In The Quarter Worrisome?

On June 12, analysts at UBS removed Wal-Mart from its “Most Preferred List.” The analysts highlighted the fact that same-store sales have declined for five quarters in a row. On July 29, analysts at Goldman Sachs downgrade to Neutral from Buy.

Government data showed in June that food stamp usage has fallen from its 2012 peak. It is unclear how this data set will play out for Wal-Mart in the coming quarters, considering Wal-Mart has captured an estimated 18 percent of the SNAP (food stamps program) market.

Also adding to Wal-Mart's woes during the quarter is the fact that Wal-Mart's U.S. President Bill Simon said that the hiring rebound reported by the U.S. Labor Department is not translating to a rise in customer spending at its stores. The executive added that the economy is “not getting any better or worse” for its core customers.

Walmart U.S. President comments disturbing, big red flag on quarter to date performance $WMT

— Brian Sozzi (@BrianSozzi) July 8, 2014

Not long after Simon's comments, the executive announced he will be “transitioning out of the company.” Simon was replaced by Greg Foran, Wal-Mart China's former CEO and a “rookie” when it comes to working in the United States.

Bank Of America's Long-Term View May Ignore Short-Term Issues

Robert Ohmes of Bank of America named Wal-Mart as a “favorite defensive stock” in an industry wide note on August 6. The analyst believes that Wal-Mart's U.S. growth outlook is supported by 3 to 4 percent square-foot growth in fiscal 2014 and 2015.

“We continue to believe Wal-Mart intends to capitalize on the success of its smaller Neighborhood Market and Express store formats by accelerated its rollout to 300 plus locations as the company pursues a potential $400 billion market opportunity,” Ohmes wrote, providing a longer-term buy thesis that may ignore short-term issues plaguing the retailer.

Nevertheless, Ohmes has a Buy rating with a $90 price target.

Brian Sozzi: Investors Should Worry

Brian Sozzi reiterated a Sell rating Tuesday with a $71 price target. Unlike Ohmes, Sozzi believes that Wal-Mart faces structural issues which should concern shareholders.

“We believe Walmart is on the cusp of truly delivering a knockout blow to investors when it reports its second quarter earnings on August 14 pre-market,” Sozzi wrote. “Given our observation of an increased number of clearance zones at numerous stores, and rising amounts of excess seasonal goods on markdown as the second quarter moved along, Walmart is at risk of missing second quarter consensus earnings per share forecasts, which are oddly near the upper-end of its $1.15-$1.25 guidance ($1.21).”

Financial crime scene, @Walmart. http://t.co/L9BioGvmI9 pic.twitter.com/91RM3YfVvT

— Brian Sozzi (@BrianSozzi) August 12, 2014

Sozzi further said that a third quarter earnings and comp guidance could be weaker than expected.

“Management likely has a desire to kitchen sink the third quarter and fiscal year earnings guidance ranges, capturing the important back to school and holiday seasons, so it could show some form of operating progress heading into 2015,” Sozzi adds.

Bottom line, Sozzi speculates that institutional shareholders could begin fleeing if Wal-Mart continues to underwhelm with its 2014 results.