In a macro-focused article earlier this year, I noticed that Walmart (NYSE:WMT) was a retailer that would earn more in an era of inflation-driven consumer trade decline. Shares in WMT have since gained slightly less 13%, nearly double the gain in the broader S&P (SPY) in the same period.
The momentum has taken WMT to all-time highs, largely due to the value proposition of its products. The company has gained market share over its competitors and steadily built its e-commerce business. The recently published results are a continued reflection of the strength of their operating model.
Although WMT’s third-quarter results were positive, markets still sent shares lower by about 7% in early market hours immediately after the release. One factor behind this may have been lower full-year EPS guidance. As WMT raised their revenue guidance, it fell short of the consensus mark. Moreover, the stock could very well have been priced to perfection yesterday at all-time highs.
A holiday season with lower prices, driven in part by the overall disinflationary trend, particularly in fuel costs, and the consumer’s continued desire for value bodes well for WMT. But at this point in the cycle, I see it as reasonable to remain “on hold” for any new or further positioning in the stock.
Key WMT stock metrics
Shares in WMT recently traded up to new all-time high prices. This follows a YTD performance of 18%, which handily outperforms the S&P (SPY) about 12% profit during the same period. WMT’s performance also significantly outperforms its Dow (DJIA) peers, which together are up just over 5.5% YTD.
One aspect of WMT’s stellar performance thus far is their sales record in the most challenging operating environment. Retail peers like Home Depot (large) and Target (TGT) both reported third-quarter results this week that showed year-over-year comparable sales declines. HD, for example, reported an annual decline of 3.1%, while TGT reported a decrease of 4.9%. The TJX Companies are an exceptionbut WMT still reported generally stronger growth rates.
Understandably, investors weren’t overly concerned with the drop in sales at both HD and TGT, as evidenced by the bid in their respective share prices immediately following the releases. It was one improved profit the prospect for TGT that particularly caught the attention of investors. This is an area in which WMT tracks. But that’s partly because of their sales mix.
The combination of higher trading multiple prospects and weaker growth prospects, as measured by Seeking Alpha’s (“SA”) quantitative rating system, is the main factor that the stock has been rated a “hold.” The analyst community and Wall Street, on the other hand, feel more positive, with Wall Street seeing roughly 6% turn me upside down in WMT.
What did WMT expect to go into earnings?
In the second quarter, WMT reported comparable sales growth of 6.4%. Although this represented a slower pace of growth than in the same period last year, it was easily above expectations for growth of 4.1%. Driving growth were food sales as well as sales of their health and wellness products, partly due to tailwinds from the popularity of GLP-1 drugs.
Income Commentary indicated that these drivers will continue to grow as a percentage of total sales in the latter half of the year. While certainly positive, the categories have a lower margin profile than WMT’s general merchandise offerings. Recognizing this, WMT emphasized that cost control would be a focus in an effort to improve the sales mix.
Despite increased attention to costs and product mix, profitability was still materially up in the second quarter compared to last year. Net income reached approximately $8.0 billion compared to $5.1 billion last year. The increase was primarily due to a more favorable comparable environment with fewer product discounts.
Expected results during the second quarter enable an increase in WMT guidance for the full year. Full-year constant currency sales were seen growing in a range of 4% to 4.5%, with net constant currency sales growth in the third quarter of around 3%.
Bottom line, full-year adjusted EPS was seen at an average point of $6.41/share and at an average point of $1.475/share for the third quarter. This reflected expected full-year operating income growth of between 7% and 7.5% and quarterly growth of around 1%.
Summary of WMT Q3 results
WMT reported continued sales and profit growth in the third quarter, further supporting the notion that Americans remain attracted to the value proposition WMT offers.
WMT once again raised its outlook for the full year, in part due to another expected quarter. Comparable US sales on a year-over-year basis increased 4.9% during the quarter. While this represents a slowdown from previous periods, it was still a healthy trend, given the declines seen elsewhere in the retail sector.
Driving sales growth was continued strength in grocery and health/wellness products, consistent with the strength reported in the first three quarters. In addition, WMT reported further market share growth in groceries, the mainstay of their overall US business.
Falling inflation has provided much-needed relief for the American consumer. Before the holiday season, WMT CEO Doug McMillon cited the lower cost of a Thanksgiving meal as one windfall for its consumers.
In addition to sales, profits continued to rise. Adjusted operating income reached +$6.2 billion in the last quarter. However, sales of non-food items have held back profitability and margins. In the third quarter, WMT’s gross profit margin was unchanged from the second quarter at 24%. However, overall adjusted EPS fell to $1.53/share, ahead of the $1.52/share expected.
The release accompanied an upward revision in full-year EPS and expectations for full-year net sales growth. WMT now expects full-year EPS to come in at a midpoint of $6.44/share, up a few cents from the previously estimated midpoint of $6.41/share. Net sales rose in a range between 5% and 5.5%, from 4% to 4.5% previously.
Is WMT Stock a Buy, Sell or Hold?
Unlike other retailers that have reported so far this week, such as Home Depot and Target, WMT is reporting continued growth in comparable store sales. A key attributing factor is the value proposition of their products, which is still paramount to consumers despite falling inflation rates. Further evidence of the appeal of discount shopping can be seen in the results of TJX Companies, which also reported growth in comparable store sales.
In one interview with CNBC, CFO John David Rainey noted that consumers are relying more on promotional-type periods and are continuing to put off larger purchases until they see a deal. This suggests that groceries and other necessities will remain WMT’s main strength for at least the remainder of the calendar year.
WMT is also benefiting from a successful build of their e-commerce model. Sales of the model rose 24% in the US during the third quarter. Additionally, complementary additions to their core business are providing another step to total revenue. Total revenue at Connect, WMT’s advertising business, for example, grew 26% year over year.
After reaching an all-time high on Wednesday, some investors may have sold the positive numbers immediately after the release. Shares fell about 7% in premarket trading. Wall Street consensus estimates also see less than 10% upside left in the stock. Forward guidance for the EPS target may have disappointed further, as the range missed the consensus estimate of $6.50/share.
In my opinion, I see WMT continuing to gain market share in the coming months. Lower fuel costs and a relatively cheaper holiday season than last year should provide a tailwind for consumers in the near term. And their continued desire for value, regardless, should keep WMT the “go-to” location for groceries and other necessities.
However, at 26 times forward earnings, the stock is not cheap. And it’s likely that the stock was priced to perfection yesterday at all-time highs. While I am positive in outlook, I see the present as an opportune time to “hold” any new or further beginnings.