Walmart Has an Earnings Surprise in Store. Why the Stock Is a Buy.

Walmart (ticker: WMT) reports its fiscal fourth-quarter numbers this coming Tuesday. Wall Street is looking for earnings per share of $1.52 from just under $160 billion in sales, roughly flat with the year-ago quarter. Those numbers look more than achievable, and its same-store sales—a common industry metric that, for Walmart, tracks revenue at stores that have been open the previous 12 months—could really pack a punch. While the Street expects them to grow at a 3.6% clip, Gordon Haskett analyst Chuck Grom expects them to jump 6.5%. Holiday sales were likely stronger than what analysts had called for, he says.

If Grom is right, the quarter will be much better than expected—but in the what-have-you-done-for-me-lately world of Wall Street, it’s the fiscal 2024 guidance that will really matter. Grom is optimistic there too. He expects Walmart to earn about $7 per share in the coming fiscal year, roughly 50 cents above consensus estimates.

With less free money flowing than early in the pandemic, and savings rates normalizing, Grom sees consumers trading down to cheaper alternatives, something that benefits Walmart far more than competitors like
Target
(TGT), which got a boost from a postpandemic tendency to trade up. That trade-down trend is partly why he upgraded Walmart shares to Buy from Hold on Feb. 10, taking his target price to $155 a share from $145. Walmart stock closed at $146.57 on Wednesday.

To be sure, Walmart might start out the year guiding conservatively. Many companies take that approach. And Baird analyst Peter Benedict sees some headwinds coming. For one thing, Walmart recently raised its starting hourly wage to $14 from $12. Benedict also sees some risk because of the way Walmart accounts for inventories, using the last in, first out, or LIFO, method. When costs are inflating, the recently purchased, more expensive merchandise hits the profit and loss statement first under LIFO. That’s only an accounting issue, though. It doesn’t impact overall economic reality. And LIFO is eventually a benefit when Walmart’s prices rise and lower-cost inventory moves through the P&L.

While Benedict sounds cautious, he isn’t all that worried. He has a Buy rating and $165 price target for the stock, up 13% from Wednesday’s close. Coming into the print, shares are up 9.8% over the past year, while the average retailer in the
S&P Retail Select Index
is down about 5%.

Still, over the past three years—about the time the pandemic started—Walmart stock has risen just 22%, roughly half the gain of the average stock in the S&P Retail Select Index and
Macy’s
(M) and Target over the same span. Those two benefited from the trade-up trend that has now reversed.

All that leaves Walmart trading at about 22 times estimated earnings over the coming 12 months, right in line with its historical average. That’s a reasonable price to pay for Walmart at a moment when it finds itself in the retail sweet spot.

Write to Al Root at allen.root@dowjones.com