Shares of the retail giant are falling over 2% in mid-day trading Thursday, reflecting both overall market bearishness on the company's ability to replicate results and concern on contracting margins.
The latter could come under further pressure in coming months as holiday sales competition ramps up, e-commerce demands more spending, and macro headwinds like tariffs and supply chain costs worsen.
Black Friday Bottom Line
As the bulk of holiday shopping comes into focus next week all eyes will be on the retail sector, led of course by Walmart and Amazon. Walmart executives have already voiced their excitement about the prospect of another positive quarter ahead based on the seasonal sales.
"We feel good about our competitive position heading into the holiday season," CFO Brett Biggs said in his prepared comments on Thursday morning. "The business remains strong, and we're executing our strategy well as the customer responds to our evolving omnichannel offering."
The preparedness for the quarter on Walmart's part was reflected in the company's guidance raise into the critical season.
That said, the retailer's competition from sales-heavy competitors could force some discounting to keep sales surging, which in turn would draw more attention to the company's already squeezed margins.
"Walmart looks good and is probably the biggest e-commerce competitor to Amazon thanks to the Jet.com purchase, however, the pressure today seems to be people worrying about margin compression that could result from heavy discounting into the holiday season," Action Alerts Plus analyst Zev Fima told Real Money. "Amazon's Black Friday deals kick off on November 16, and you know every other retailer is going to have to get creative to compete and, in this case, creative means discounts."
E-commerce is Essential
In order to compete with Amazon specifically, the company will also need to add to its e-commerce spending to keep the momentum from blockbuster growth in the segment from the third quarter going, which could eat into margins further.
It may be a necessary step, however, to make sure Walmart is not bullied by Amazon.
"Overall we continue to view Walmart's strategy to invest in price and e-commerce favorably as it results in comp outperformance, with SG&A expense leverage helping to offset gross margin pressure," Stifel analyst Mark Astrachan argued. "We look to be more constructive on weakness, all else being equal."
Astrachan issued a hold rating and a $105 price target given his bullishness on the company's digital effort which helps justify a slightly expensive price to earnings ratio for the company in his view.
Macro Pressures Minimize Margins
Of course, any discussion of margins would be incomplete without the two T's of margin pressure: Transportation and tariffs.
"Tariffs are not positive for the economy," Biggs told the media on a conference call Thursday morning. "Prices will go up."
This seems to be self-evident, but the pressure will be especially tough on Walmart amid a price battle given the company sources a good deal of its goods, up to 70% in fact, from China.
"Adding to price pressure is the uncertainty around China, where Walmart gets a lot of its goods," Fima told Real Money, noting that these factors can help weigh on shares especially after the retailer emerged as a rare winner in the October correction.
Only one week ahead of Black Friday, more than just the pure sales numbers will come in as significant factors to watch.