Walmart Earnings Were Strong. The Stock Slides on Cautious Consumer Outlook.

Revenue rose by 5.2% from the year-ago quarter to $160.8 billion, topping estimates for $159.7 billion. U.S. same-store sales rose 4.7%. While that’s better than expected — analysts predicted they would rise by 3.9% — it marks a deceleration from the year-ago quarter’s 8.5% surge

The company raised guidance for fiscal 2024—but it fell short of what analysts were expecting. Adjusted earnings per share were estimated at between $6.40 and $6.48 a share, slightly below the $6.50 analysts had penciled in. Net sales will increase between 5% and 5.5%.

Previous guidance called for sales to grow between 4% and 4.5%, and for earnings to range around $6.36 to $6.46 a share.

“We’re not immune from the vagaries of the economy,” said John David Rainey,
Walmart
‘s chief financial officer, on a call with analysts. “We see our customers showing ongoing discretion and making trade offs to be able to afford the things they want given the sustained high cost of the things they need.”

Rainey noted that the company saw a slowdown in spending in the back half of October. While sales have ticked back up in November heading into the holiday season, the company is taking a cautious approach in response to the sales unevenness.

Walmart stock fell 6.6% to $158.55 in morning trading Thursday. Part of the reason for investor pessimism following the report is that expectations were high heading into the print—and guidance failed to meet the mark.

The company has been outperforming competitors for several quarters now, and its share price reflects that. As of Wednesday’s close, Walmart stock traded at 24.3 times forward earnings, while
Target’s
(TGT) shares trade at 14.7 times earnings and
Home Depot
(HD) at 19.9, according to FactSet. 

That premium valuation has been justified so far, given that the company has been gaining market share is likely to keep doing so, wrote Oppenheimer analyst Rupesh Parikh in a note to clients ahead of the report. But high expectations left “limited room for error.”

“It would have taken a real blockbuster announcement to move it up because that was already priced,” said Don Nesbitt, portfolio manager at F/m Investments.

Walmart’s downward move was especially stark considering that rival
Target
(TGT) gained double-digits after its earnings report, which was arguably more mixed than Walmart’s. While Target beat expectations, the company saw revenue decline year-over-year. But as with Walmart, it all comes down to expectations, Nesbitt said. The bar was lower for Target ahead of earnings. 

TJX Cos.
(TJX) fell victim to the same ill that plagued Walmart this morning—because of high expectations, softer guidance overshadowed an otherwise strong quarter, sending the stock lower after the report. 

And indeed, long-term investors like aren’t too concerned about Walmart’s downturn. D.A. Davidson analyst Michael Baker noted that given the sales volatility, “it does make sense” for Walmart to be slightly more cautious on the consumer heading into the holiday season. What’s more, Walmart has been known to be conservative in its guidance, which could potentially set the company up for another beat in the fourth quarter, he added in a note to clients. He maintained a Buy rating on the stock. 

In a note published Thursday, Parikh, who has an Outperform rating on the stock, urged investors to take advantage of the dip.

On his end, Nesbitt, who aims to buy stocks when expectations are lowest and sell when they get overheated, says the shares still have room to run, and that the company is well positioned for the macroeconomic environment.

“We’re holding long term positions that we believe that represent good valuation and have good momentum features,” Nesbitt said. Walmart “continues to beat earnings, they continue to guide upward. It’s got a lot of hallmarks that we like.”

Write to Sabrina Escobar at [email protected]