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Can Walmart’s Fiscal 4Q18 Results Raise Its Stock Higher?

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Part 5
Can Walmart’s Fiscal 4Q18 Results Raise Its Stock Higher? PART 5 OF 6

Why Walmart’s Fiscal 4Q18 Margins Could Remain Low

What’s holding back margin expansion?

Margins for mass merchandisers remain muted since increased investments in growth initiatives are taking a toll on profitability. Three of the nation’s largest mass merchandisers—Walmart (WMT), Costco (COST), and Target (TGT)—continue to invest in price to drive store traffic amid increased competition from Amazon (AMZN) in the grocery business. Increased investments to further support their digital businesses remain a drag.

Why Walmart’s Fiscal 4Q18 Margins Could Remain Low

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During its last reported quarter, Walmart’s gross margins fell 29 basis points. Its operating margins contracted 50 basis points. In comparison, Target and Costco had sluggish margins during their last reported quarters.

What to expect

Walmart’s fiscal 4Q18 gross margins are expected to remain soft since benefits from increased sales are likely to be more than offset by price investments and an unfavorable mix due to a growing share of digital sales. The company’s operating profit margins could remain muted since a lower gross margin rate is expected to remain a drag.

As for its peers, Target’s profit margins are also expected to take a hit from value pricing. Increased digital fulfillment charges and a growing mix of e-commerce sales could lower its profitability.

In comparison, Costco’s sales leverage and inflation in gasoline prices could cushion its margins. Increased membership fee income and cost savings could support its profits. However, increased price investments are expected to offset the positives.

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