Four factors investors should watch when Walmart reports earnings Tuesday

Published Mon, Aug 16 202112:02 PM EDTUpdated Mon, Aug 16 20212:11 PM EDT

Melissa Repko @in/melissa-repko @melissa_repko

Walmart will report its fiscal 2022 second-quarter earnings on Tuesday, signaling to investors how it is faring as it navigates the back-to-school season and the spread of the Covid delta variant. A year ago, the discounter benefited as shoppers rushed to its stores and website to spend stimulus checks , causing U.S. same-store sales to rise 9.3% during the three-month period . Yet it also saw sales taper off in July 2020, as Walmart's supercenters had limited hours and some shoppers bought food at local supermarkets instead. The discounter is juggling a complex mix of factors. Its sales could potentially as consumers spend more on experiences like dining out and traveling instead of buying food for home. Its e-commerce gains could fade as shoppers resume old habits. Rising inflation and capital investments could weigh on the retailer's profitability. Yet many analysts see the big-box retailer as teed up for growth in the coming quarters, as it capitalizes on pent-up demand for back-to-school shopping, benefits from a healthy consumer and regains market share in its grocery business. The company also anticipates growth and forecasts that Walmart U.S. and Sam's Club same-store sales will increase in the low single-digits this year, excluding fuel and tobacco. If Walmart puts up a strong second-quarter performance, the big-box retailer's stock could grab more of investors' attention. As of Friday's close, shares of the company have risen about 4% this year, lagging behind other pandemic beneficiaries in the retail industry like Target (48%), Kroger (35%), Home Depot (25%) and Dollar General (13%) — and consumer staples and the S & P 500 in general. Walmart's shares traded at around $150 on Monday, bringing its market share to about $423 billion. Wall Street analysts surveyed by Refinitiv are forecasting adjusted earnings per share of $1.57 on revenues of $137.17 billion. They expect same-store sales growth of 3.3% for Walmart U.S., excluding fuel, according to a survey of analysts by StreetAccount. As Walmart reveals its latest results, investors should pay attention to these four key areas. 1. Strength of the grocery business Walmart is the country's largest grocer , an edge that helps it drive frequency as customers come to stores to fill their fridges. Nearly 60% of Walmart U.S. sales came from grocery in the last fiscal year, which ended in January, according to financial filings. During the pandemic, however, the discounter faced tougher competition as some customers were more concerned about convenience than price and shopped at smaller, local supermarkets instead. That tide appears to turning, however, as consumers resume more typical shopping behavior and hunt for lower prices again. In the first quarter , Walmart emphasized that it had won back market share in grocery and saw strong sales in meat and bakery. Walmart's store visits have gained momentum in recent months, according to Placer.ai, an analytics firm that tracks foot traffic based on mobile device location data. That could bode well for grocery, which can inspire customers to toss extras into their carts, from clothes to toys. Walmart saw year-over-year visit increases of 1.6%, 8.6% and 17.8% in May, June and July, respectively, Placer.ai found. Notably, its store visits grew by nearly 3% in July from July 2019 — marking the first time in 2021 when its store visits exceeded pre-pandemic traffic levels. 2. Back-to-school bounce Walmart could grab a large piece of back-to-school shopping in a year when that spending is expected to jump . Those sales could start showing up in the second quarter. Industry watchers have predicted pent-up demand will lead to more spending on school supplies, apparel, technology and more. Back-to-school sales in the U.S. are expected to grow 6.7% from 2019 and 5.5% from last year , according to a forecast by Mastercard SpendingPulse. Child tax credit payments dropped into family's bank accounts could also entice parents to spend more on their kids. The monthly payments of $250 or $300, depending on the child's age, began in July and continue through December . Robby Ohmes, a retail analyst for Bank of America, said back-to-school merchandise is also a win for Walmart because it supports the general merchandise sales, a category that's more profitable than selling food. 3. Managing costs Like other retailers, Walmart is under pressure from suppliers who are hiking prices on everything from food to personal-care items. Plus, it has an aggressive investment plan this fiscal year, such as adding automated fulfillment centers for online grocery orders to stores — a step-up in spending that may not fade away anytime soon. Simeon Gutman, a retail analyst for Morgan Stanley, said those costs could cut into the big-box player's profitability. He said Walmart will have to make a call about whether — or how much — of those higher costs to pass on to customers without hurting its reputation for " Everyday Low Prices ." "That could be a challenge because one fear is Walmart in their desire to invest back into price and gain more in market share may not let prices go up as much as their competitors," he said. Yet Walmart's size could give the company more leverage than smaller retailers, said Krisztina Katai, a retail equity research analyst for Deutsche Bank. "They're in a much better position to negotiate with vendors and potentially push back on cost increases that they don't want to accept," she said. 4. The delta variant For some investors, the days of pandemic-related disruptions seemed to be in the rearview mirror. Instead, they saw tough comparisons up ahead as Walmart and other big-box players and grocers lapped sales when people were spending on food and entertainment for home rather than juggling other costs, like commuting, traveling or eating at restaurants. However, with another steep wave of Covid cases and hospitalizations in parts of the U.S., the return to a post-Covid world seems further away, said Gutman. He said the delta variant raises new questions about whether consumer spending will shift, such as reverting more to e-commerce or to food at home rather than experiences. Yet Gutman said he does not expect the delta variant to inhibit or alter shopping to the same degree it did last year, since retailers and consumers have gotten more used to managing through the pandemic. "It's a pothole," he said. "It's a setback. It's probably not a derailment."

A shopper carries a bag outside a Walmart store in San Leandro, California, on Thursday, May 13, 2021.

David Paul Morris | Bloomberg | Getty Images

Walmart will report its fiscal 2022 second-quarter earnings on Tuesday, signaling to investors how it is faring as it navigates the back-to-school season and the spread of the Covid delta variant.