Walmart announces its earnings on Tuesday. What to expect.

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Keep an eye out

Walmart

Stock when market opens on Tuesday, analysts say. The retail giant is poised to deliver another strong quarter, fueled in part by a strong holiday season, and shares may be poised for a rally.

Analysts expect Walmart (Ticker:

WMT

) to return adjusted earnings per share of $1.52 on sales of $159.7 billion in the fourth quarter.

Same-store sales, an industry metric that tracks sales at stores open longer than a year, are expected to rise 4.9%.

For nine of the last 10 straight quarters, Walmart has comfortably beaten estimates for same-store sales, and, how Barrons As previously reported, Wall Street believes the company is well positioned to do the same on Tuesday.

On Friday, Evercore ISI analyst Greg Melich added Walmart to the company’s list of positive tactical trade ideas, writing that same-store sales “will likely be ahead of consensus,” leading to an increase in earnings. According to Evercore, a tactical call describes a short-term event or catalyst that could subsequently affect the price of a stock.

Key to Walmart’s same-store growth has been its grocery store, which has gained market share as inflation has prompted shoppers to seek better deals. Walmart’s executive team has repeatedly said the company is seeing a spike in visits from higher-income shoppers looking to boost their budgets, a trend that could continue into the end of the year, analysts say.

“Walmart’s price leadership and strong exposure to groceries and other high-traffic items positions it well to capitalize on an increasingly stressed consumer in 2023,” CFRA analyst Arun Sundaram wrote in a research note.

But looking at the stock’s recent performance, not everyone agrees with Sundaram and Melich’s optimistic outlook. Walmart’s stock has been little for the year, up 2.3% year-to-date and underperforming both the S&P 500’s 5.5% rise and the SPDR S&P Retail Exchange Traded Fund’s 17% rise .

There are two factors holding investors back: margins and guidance.

The company’s gross margins have struggled lately as they come under pressure from increased rebates and rising operating expenses. Some of those factors could be easing — transportation costs, for example, are set to come down in 2023, analysts say, and it’s likely that Walmart has worked off the excess inventory that’s prompted markdowns. But there are still ongoing pressures, including higher labor costs and slowing demand for high-margin products like electronics, apparel and other daily necessities, Sundaram wrote.

A bigger concern is that Walmart could issue cautious guidance for fiscal 2023 — a likely scenario as consumers, particularly those on low incomes, could face a challenging year. The debate here is whether the market has already priced in a more muted outlook. If that’s the case, the stock could rally. If it doesn’t, chances are the stock will continue to stagnate or fall. Walmart shares currently trade at a price-to-earnings multiple of 22, which is in-line with the median ratio and ahead of competitor Target’s 18.6. JP Morgan’s Christopher Horvers sees the stock as fairly valued.

“In short, given full valuation, disinflation, real economic risk to its core consumer (with challenges keeping higher-income consumers in a recovery), and the prospect of the Fed eventually cutting, we believe the stock will remain in a range,” Horvers wrote.

Walmart and

home depot

both report their earnings ahead of Tuesday’s opening bell. Both companies’ forecasts typically set the tone for the remainder of the retail earnings period, Horvers wrote. This time, the caution expressed by two of America’s largest retailers could change expectations for the companies that follow, he added.

Write to Sabrina Escobar at sabrina.escobar@barrons.com