Dow component Walmart Inc. (WMT) is trading lower by more than 5% in Thursday's pre-market session after missing fourth quarter 2021 (November to January) earnings estimates despite higher-than-expected revenue. The retail giant posted a profit of $1.39 per share, $0.12 worse than guidance, while revenue surged 7.3% year over year to $152.1 billion, beating expectations by $5 billion. U.S. comparative sales increased 8.6%, with strength noted in most categories.

Key Takeaways

  • Walmart missed fourth quarter 2021 earnings estimates and lowered fiscal year guidance.
  • A commitment to higher wages may have added to an aggressive the sell-the-news reaction. 
  • The stock has been under distribution for several months.
  • This downturn does not look like a buying opportunity.

U.S. e-commerce sales grew by 69%, marking a bright spot in the otherwise mixed fourth quarter metrics. The company blamed part of the earnings shortfall on a decision to repay property tax relief in the United Kingdom. Lower fiscal year 2022 guidance also caught shareholders off guard, along with an announcement that average associate wages will rise above $15 per hour, pressuring profit margins.

Walmart benefited from the pandemic in 2020, with smaller retailers forced to close or curb operations due to social distancing requirements. The stock continued to post new highs into November, when positive Pfizer Inc. (PFE) vaccine news marked the start of a sustained rotation out of COVID-19 beneficiaries and into recovery plays. Aggressive distribution since that time indicates that many institutional shareholders have closed positions.

A better-than-expected holiday season raised market expectations ahead of the release, also contributing to the strong sell-the-news reaction. In addition, January retail sales surged more than 5%, beating estimates by a wide margin, with citizens using $600 stimulus checks to load up on higher-ticket purchases. Walmart's better-than expected revenue, coupled with lowered guidance, tells us that sales are booming but not translating into higher profits.

Wall Street consensus on Walmart stock is mixed, with an "Overweight" rating based upon 20 "Buy," 6 "Overweight," 6 "Hold," 1 "Underweight," and 2 "Sell" recommendations. Price targets currently range from a low of $104 to a Street-high $180, while the stock is set to open Thursday's session more than $25 below the median $165 target. This depressed placement tells us that analysts have been too optimistic about the long-term outlook.

Tip

Sector rotation refers to the act of shifting investment assets from one sector of the economy to another. Sector rotation involves using the proceeds from the sale of securities related to a particular investment sector for the purchase of securities in another sector. This strategy is used as a way to capture returns from market cycles and to diversify holdings over a specified holding period.

Walmart Daily Chart (2018 – 2021)

Chart showing the share price performance of Walmart Inc. (WMT)

TradingView.com

A breakout to new highs topped out at $109.98 in the first quarter of 2018, giving way to a decline that tested new support in the $80s in May and December. Another breakout in June 2019 made limited progress into February 2020, when the stock gyrated violently, caught in a tug of war between bulls and bears. It posted a nine-month low in March and turned sharply higher into the second quarter, clearing resistance in the $130s in August.

Buying pressure eased above $150 in September, ahead of a failed November breakout attempt. The stock has been pulling back since that time and is struggling to hold 50-day exponential moving average (EMA) support. Meanwhile, the on-balance volume (OBV) accumulation-distribution indicator has painted a bearish picture, topping out in October 2019 and posting two failed breakout attempts into November 2020's lower high.

Distribution between those peaks suggests aggressive selling pressure under the surface, consistent with institutions closing out long-term positions. Meanwhile, the monthly stochastic oscillator has crossed into an active sell cycle, predicting that current weakness will persist well into the second quarter. Neither technical element bodes well for current shareholders or post-news dip buyers.

Tip

Accumulation/distribution (A/D) uses volume and price to assess whether a stock is being accumulated or distributed. A/D seeks to identify divergences between the stock price and volume flow. This provides insight into how strong a trend is. If the price is rising but the indicator is falling, it suggests that buying or accumulation volume may not be enough to support the price rise and that a price decline could be forthcoming.

The Bottom Line

Walmart missed fourth quarter profit estimates and lowered fiscal year guidance in a mixed quarterly release.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.