What Do Walmart’s Q4 Results Mean? Bad News For The S&P 500

Walmart NYSE: WMT did not have a terrible quarter and its guidance, weak as it is, does not spell doom for the economy but they do mean bad news for the S&P 500. While consolidation within the retail sector, trading down to cheaper brands and market share gains in grocery support the business this strength is priced in. Worse, the outlook for 2023 is deteriorating, which is weighing on Walmart’s stock price. 

Now, assume these trends are present across the retail universe, and you have a recipe for a massive downshift in earnings expectations and consumer traffic that will have a far-reaching impact. The consensus estimates for S&P 500 earnings growth are already trending lower, and the FY figure is on the brink of turning negative.

If that happens, there is nowhere for the broad market to go but lower. Home Depot NYSE: HD has already issued weak guidance, and names like Target NYSE: TGT, Lowes NYSE: LOW and Costco NYSE: COST reports over the next few weeks. 

Walmart Beats And Lowers Guidance, Stock Follows Suit 

Walmart had a good Q4, but the results were not as impressive as they could have been, and the guidance was weak. Markdowns and mix were blamed, and based on the inventory levels and economic outlook, these trends should be expected to continue or worsen in the coming quarters.

Inventory is reported as up slightly versus last year, which is a big improvement from the double-digit increases posted earlier this year. However, it is still up 26% versus 2 years ago and affecting operating performance. The good news is that inventory is down 12% sequentially, so clearance efforts are working. 

Revenue came in at $164.05 million or up 7.3% versus last year, beating the Marketbeat.com consensus by $5.38 million. This is offset by a contraction in gross margin driven by markdowns and mix-shifts that left the adjusted earnings up but only 6.9% versus the 7.3% gain on the top line. US comp sales led the gains and are up 8.3% on a 6.3% increase in ticket average and a 1.8% increase in traffic. E-commerce contributed 17% to the take. On the bottom line, the $1.71 in adjusted EPS beat by $0.20, but this is where the good news ends. 

The guidance has comps up for Q1 and FY23, but growth will slow to only 4.5% in Q1 and 3.0% for the year, which is at the top end of the range. The risk is that consumer trends will worsen, leading the company to lower guidance again later in the year. 

Highly-Valued Walmart Due For A Reset 

The trend in analysts' sentiment toward Walmart was favorable ahead of the Q4 release. The stock hadn’t seen any major upgrades for a while but the trend in the price target was upward and had put a bottom in the market. There have been no commentaries picked up by Marketbeat’s tracking tools yet.

Still, we have to assume some of those very recent price targets are getting reconsidered due to the high 25X valuation, less-than-stunning 1.5% dividend yield and the weak outlook. As it is, the stock is a Moderate Buy with a price target about 15% above the post-release price action. 

The charts are not promising either. The stock is down about 3.0% in premarket trading and could go lower. The 150-day moving average is acting as support, and this level is consistent with the middle of a trading range so it may be strong enough to hold the market up. If not, this stock will likely retest the bottom of the range near $135, which could go lower.

In that scenario, the $130 and $125 levels look like potential support levels. At best, investors should assume this stock will remain range bound for the foreseeable future, which also goes for the broad market.