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Walmart Earnings Preview: Can Falling Gas Prices Provide Second Half Spending Lift?

Falling gas prices are saving Americans $400 million a week for discretionary spending. Will some of that flow into Walmart over the second half of the year?

Walmart  (WMT)  shares edged higher Monday ahead of the retailer's second quarter earnings prior to the start of trading Tuesday, with investors focused on whether its muted near-term outlook could be altered by slumping gas prices and improving consumer confidence.

Walmart cautioned late last month that "increasing levels of food and fuel inflation are affecting how customers spend", adding that while inflation is likely to support the dollar value of sales between now and the end of the year, shoppers are spending less on discretionary items such as clothing and shoes.

That likely means second quarter sales growth of around 7.5% from last years levels, Walmart said, but an 8% to 9% slide in adjusted earnings as margins compress and the retailer moves to shift its bloated first half inventories with deeper price cuts.

Analysts are looking for an adjusted bottom line of $1.62 per share, a 9% decline from last year's levels, on revenues of around $150.8 billion. U.S. same store sales are forecast to rise 4%. 

"The biggest focus for the results release is inventory situation as of end-2Q," said Daiwa Capital Markets analyst Kahori Tamada, who carries and 'overweight' rating with a $130 price target on Walmart stock. 

"We are interested in whether the firm had already ordered inventory for the holiday shopping season before sales started softening, and if so, whether it is able to cancel those orders," she added. "In addition, excess inventories are a key issue for the retail industry overall. Amid unprecedented inflation, predicting the macroeconomic environment is difficult, which makes it likely that earnings visibility will remain clouded going forward."

Looking into the back half of the year, Walmart said it sees operating margins narrowing further, to between 3.8% and 3.9%, with adjusted earnings falling between 11% and 13% from 2021 levels. Net sales, however, will likely slow to a pace of 4.5% for the full year owing to a $1.8 headwind linked to the strength of the U.S. dollar.

A stronger dollar erodes the value of overseas sales, and makes profits generated in foreign markets more costly to repatriate. The U.S. dollar index, which tracks the greenback against a basket of six major global currencies, has risen more than 12% so far this year and reached a fresh two-decade peak earlier this month.

Still, Walmart may find that the recent pullback in U.S. gas prices, which the American Automobile Association pegged at $3.965 on Sunday -- the lowest since early March -- could be an accelerant to what is already described as a solid start to back-to-school sales in the United States. 

Bloomberg data suggests Americans are spending $400 million less each week as a result of the decline in gas prices, which have fallen for 59 consecutive days, and a good portion of that savings is likely to find its way back into Walmart revenues heading into the October quarter and beyond.

Consumer sentiment is also on the mend, with data from the University of Michigan last week showing expectations at a five-month high even as the survey's closely-tracked tally of current conditions remained muted.

The job market, as well, is showing signs of maintaining its solid 2022 gains, with new hires rising to 528,000 last month pulling the headline unemployment rate to 3.5%. Wages, while not keeping pace with the 8.5% inflation rate recorded over the same month, are still up 5.2% from last year, data from the Bureau of Labor Statistics indicated earlier this month. 

 Walmart shares were marked 0.65% higher in early Monday trading to change hands at $133.13 each, a move that would leave the stock with a six-month decline of around 0.9% and value the Bentonville, Arkansas-based retail giant at around $365 billion.