Wall Street is welcoming the emerging picture of Walmart Inc.'s (WMT) international efforts, despite the geopolitical trade risks spooking markets at present.
Shares of the retail giant bounced nearly 2% in Thursday afternoon trading, benefiting from a strong beat on earnings per share and a confident earnings call pre-market.
Aside from e-commerce growth headlined by the company's ambitions to compete with Amazon.com, Inc. (AMZN) for convenient, next-day delivery services, the international aspect of the all-American company is enticing for analysts.
While the headline figures reflect declining net sales at Walmart International, most of that is explained by currency impacts and the sale of Brazilian operations.
"In our International division comps were positive in seven of our markets and net sales increased 1.2 percent in constant currency," CEO Doug McMillon said in prepared remarks to analysts on Thursday morning. "Reported net sales declined 4.9 percent in the period as the effect of foreign currency translations presented a headwind of $1.8 billion."
Excluding currency impacts, net sales actually increased, suggesting growth among the giant retailer's businesses abroad, notably Flipkart, could be growing rapidly to offset this impact.
"There is a lot of noise in this segment given the steps WMT has taken to reshape its International portfolio over the past couple of years," Morgan Stanley analyst Simeon Gutman acknowledged. "The sale of WMT's Brazilian operations was a headwind to revenue, partially offset by Flipkart's sales (which likely grew at a high rate in the quarter)."
Importantly, Flipkart's drag on margins/earnings was no worse than expected, despite the challenges posed by abrupt changes in Indian e-commerce regulations announced late in 2018, and Flipkart's impact on 2019 EPS guidance is unchanged," he added.
Still, some see the hefty price tag and risks remaining at Flipkart as a reason to remain cautious.
"The dilution and risks associated with the Flipkart transaction and a valuation consistent with peak levels keeps us sidelined," Oppenheimer analyst Rupesh Parikh wrote in a note to clients, advising a "Hold" rating.
Closer to home, sales grew 49% in the period at the company's Mexican operation, Walmex, while U.K. sales also reflected positive results despite the failure of the Sainsbury and Asda merger the company had backed.
"We're focused on continuing to execute the strategy to strengthen Asda's long term success, including the potential of an IPO at some point in the future," McMillon said. "We remain focused and confident in our International strategy of building strong local businesses powered by Walmart."
Additionally, he cited the Chinese partnership with JD.com, Inc. (JD) for grocery delivery as progressing well. Net sales in the region increased 1.4%, while same store sales grew 0.4%.
"We were up against difficult comparisons in the quarter, but on a two-year stacked basis, the comp was up 4.4%.," McMillon explained. "We're pleased with our omni-channel initiatives and expanded the one-hour delivery service through Dada-JD Daojia, which is now available in nearly 300 stores."
Still, the Chinese region will obviously be impacted by the ongoing trade war, which stands to weaken consumers and affect supply chains on both sides of the conflict.
"We're monitoring the tariff discussions and are hopeful that an agreement can be reached. Our goal is to always be the low-price leader, and we will actively manage pricing and margins as warranted with our customers and shareholders in mind," McMillon said. "Our merchant teams have been focused on this for months and continue to execute appropriate mitigation strategies."
Still, as Walmart imports more than a quarter of its everyday low-priced goods from China, the impact moving forward will be of massive importance.
"We want to manage margins with customers and shareholders in mind," CFO Brett Biggs added in an interview Thursday. "We have mitigation strategies that have been in place for months, but increased tariffs will increase prices for customers."
As such, the international view of the company may be encouraging, but geopolitical impacts abroad will indeed reverberate on the company's biggest market and home soil.
Still, analysts remained confident Walmart can indeed mitigate the reciprocal effects from its international base.
"We believe WMT remains among the best positioned retailers in our space from a tariff standpoint," Gutman said. "Its high proportion of domestically sourced consumables, sizeable scale and unparalleled purchasing/negotiating power should prove to be a solid defense."
He added that he believes the majority of tariff-related headwinds will be eaten by suppliers, which will allow the retailer to soften other impacts on a business efficiency level.
"That WMT's US gross margin inflected positively for the first time in roughly two years in Q1 incrementally increases our confidence in its ability to offset the potential margin impact from tariffs," he concluded.
Gutman set a $112 price target for the stock with an "overweight" rating, above the consensus target at $109.32 and in line with the Wall Street consensus rating recommendation.