Walmart is set to unveil its third-quarter financial results on Tuesday before the market open. The company has largely benefited after the pandemic onset because it was considered an essential retailer by the regulators, allowing the firm’s stores to remain open while most of its competitors were forced to shut down their shops. Nevertheless, to keep up with the competition and further boost its revenue, the enterprise also improved its delivery subscription service, Walmart+. Although the retail giant is estimated to have a substantially high penetration rate of 11.1% in the US households due to its e-commerce business, its financial figures are anticipated to come out soft.

Can rising costs affect Walmart?

Since the global economic reopening, retailers have faced many challenges . Firstly, there is a long-lasting supply and demand imbalance as consumer demand remains high, while a covid-19 outbreak in a manufacturing facility can cease production for several days, severely damaging supply. This asymmetry results in increasing costs for both customers and corporations. Moreover, the ongoing supply chain disruptions such as the shortage of lorry drivers and port congestion have further elevated the firm’s expenses, alongside surging energy prices.

To offset these issues, the retail behemoth has taken a wide range of measures. Walmart announced that it will soon build a fully automated fulfillment center and an automated grocery distribution center, which will significantly reduce the supply bottlenecks. Furthermore, the firm is one of the first to have acquired drones and autonomous vehicles to assist in last-mile deliveries. Finally, the firm weighs on its strong brand and customer loyalty to pass on part of the rising costs to consumers and maintain decent margins, while keeping prices lower than most rivals.

Despite the favorable environment and the company’s state-of-the-art advancements, its stock has been underperforming both relative to the major indexes and its competitors in 2021.

Slowdown in earnings

Walmart’s strong e-commerce business was expected to fuel the firm’s growth in the September quarter, but the rising costs seem to pose a serious threat to the firm’s financial performance. The retail giant is anticipated to post revenue of $135.85 billion, according to consensus estimates by Refinitiv IBES, which would represent a marginal year-on-year growth of 0.85% and a 4% decrease against the last quarter. Earnings per share (EPS) are estimated to decrease 20% relative to the last quarter to reach $1.41 but increase 4.85% on an annual basis.

As for any potential surprises, the company has a strong history of outperforming expectations, having beaten revenue projections in all six of the preceding quarters.

Valuation is reasonable

Although Walmart realized huge gains after the Covid-19 pandemic outbreak, the company is facing tough challenges due to the current inflationary environment and the supply chain disruptions. The firm currently seems undervalued with a trailing 12-month price to earnings (P/E) ratio of 24 (as of November 12, 2021), which is lower than the retail sector average of 39.2. Moreover, its forward 12-month P/E ratio is currently at 22.4, with its sector posting an average of 41.4. Hence, these indications might suggest increased future earnings potential for the company, which has not been fully priced in by the markets yet. Alternatively, a low future P/E ratio might also signal pessimistic growth prospects, but as Walmart is developing leading services for its e-commerce business, this is unlikely to be the case here.

Levels to watch

Taking a technical look at Walmart, the stock has been moving in a sideways pattern in 2021, fluctuating near record highs. The earnings announcement could provide a clear direction to the price, as a strong report could propel the price higher where initial resistance could be met at the $150.3 barrier. If the price continues its ascent, then the next target for the bulls might be the 10-month high of $152.5.

On the flipside, should the earnings disappoint, immediate support may be found near the 50-day moving average region, currently at $144.39. If the selling pressure intensifies and the price dips lower, the $138 level might prove a strong obstacle for the bears.

The consensus recommendation for Walmart from Refinitiv analysts is ‘buy’, as the innovative developments of its e-commerce business are expected to help it flourish in the future and offset the ongoing supply chain issues. However, there are still dangers associated with pandemic-related outbreaks at the company's physical locations, while persistent inflationary pressures continue to boost its operating costs.