Walmart’s Financial Outlook Amid eCommerce Revolution
Contributor since 2013 / 7798 Followers
Summary:
- Walmart’s FY Q3 2024 performance demonstrates resilience, diversification, and digital transformation in the retail industry.
- The company’s growth in global advertising and eCommerce sales contributes to its success, but unforeseen expenses pose risks to profitability.
- WMT’s focus on digital capabilities, supply chain modernization, and diversification of revenue streams position it well for future growth and profitability.
Alexander Farnsworth
In the ever-evolving landscape of the retail industry, Walmart’s (NYSE:WMT) journey, as evidenced in part by its FY Q3 2024 performance, offers a compelling case study of resilience, diversification, and digital transformation. This analysis examines the company’s performance within a broader context, exploring the strategic moves and systemic changes that have shaped its trajectory. While the noteworthy growth in global advertising and burgeoning eCommerce sales contribute to the story, the narrative extends beyond these figures. From addressing unforeseen expenses to strategizing for a more digitally-focused business model, the company’s actions reflect a larger vision. This article delves into the broader dynamics shaping Walmart’s present and future, offering an in-depth perspective on its competitive positioning in the global retail industry.
FYQ3 Points To Continued Execution Amid Challenges
In our opinion, the company’s financial performance during FY Q3 2024 was robust, with growth seen across all segments. Walmart’s commitment to its full-year sales guidance of 5% to 5.5%, up from 4% to 4.5% previously, demonstrates its confidence in continued strong performance.
The growth of Walmart’s global advertising, which grew approximately 20% in Q3, is particularly impressive. The significant increase in advertising revenues indicates that the company’s efforts to monetize its customer base and diversify its revenue streams are succeeding. However, we also note that this growth could be subject to cyclical trends and changes in advertising spending patterns.
On the negative side, Walmart noted unexpected increases in SG&A expenses due to legal costs and recovery costs associated with unplanned store closures due to a hurricane in Mexico. These unforeseen expenses pose risks to profitability and emphasize the importance of contingency planning and risk management.
In terms of its eCommerce business, Walmart U.S. saw a 24% increase in sales, while Sam’s Club U.S. experienced a 16% growth. These figures highlight the company’s successful transition towards a more digital-focused business model. Walmart’s eCommerce growth, combined with its strong physical retail presence, positions it well to capitalize on the evolving shopping behaviors of consumers.
However, we believe that Walmart should continue investing in its digital capabilities to ensure it remains competitive in an increasingly online-oriented retail landscape. The company’s recent initiatives, such as the expansion of its marketplace and fulfillment services, are steps in the right direction but will require sustained investment and focus.
We are also optimistic about Walmart’s approach to modernizing its supply chain. The company’s plans to automate its supply chain and implement higher-margin growth initiatives could significantly improve its profitability over the coming years.
The company’s Q3 performance also highlighted the value of diversification. Despite unexpected expenses and challenges, Walmart’s broad-based contributions across segments, markets, channels, formats, and strategic growth areas helped buffer its overall financial performance.
Looking ahead, Walmart’s outlook for Q4 and beyond is cautiously optimistic. The company expects to grow its share and anticipates that profit and sales growth will favor profitability. However, it also acknowledges potential headwinds such as a choppy consumer environment and wage inflation.
Our analysis suggests that while Walmart faces some challenges, it has a solid growth strategy and is well-positioned to capitalize on future opportunities. The company’s commitment to digital transformation, supply chain modernization, and diversification of revenue streams should continue to drive growth and profitability. However, ongoing investment and strategic focus will be critical for sustaining this momentum.
Fundamental Analysis
In our analysis, Walmart has many competitive advantages that put it at the forefront of the retail industry. Given its expansive physical footprint and entrenched position in the communities it serves, Walmart has been able to maintain its status as the nation’s preeminent retailer for over three decades. In our view, this is a significant competitive edge that cannot be easily replicated by any competitor, even in the face of the growing e-commerce trend. However, the company’s stronghold in the traditional brick-and-mortar retail space is being challenged by the rapid shift to online shopping, led by Amazon (AMZN) and other e-commerce giants such as Shopify (SHOP).
One of the major strengths of Walmart lies in its competitive moat, which we believe is wide. Our assessment of this is based on the company’s unique promise of a wide assortment of goods at low prices, a strategy that has allowed it to retain a loyal customer base. This, combined with the company’s vast scale, enables it to negotiate lower prices with suppliers and pass these savings on to consumers. This cost advantage, in our opinion, creates a significant barrier to entry for competitors.
However, in our view, Walmart’s position in U.S. retail is not without competition. The industry is notoriously competitive due to the virtual absence of customer switching costs and the disruption caused by online penetration, notably the accelerated rise of e-commerce powerhouse Amazon. The business model of traditional brick-and-mortar retailers is being put at risk of obsolescence, and Walmart is no exception.
In response to these challenges, Walmart has been investing heavily in technology and innovation to develop its omnichannel capabilities. This involves leveraging its vast physical footprint and financial resources to create a seamless shopping experience for customers, whether they shop online or in-store. The launch of its Walmart+ subscription service and third-party online marketplace are prime examples of the company’s innovative efforts to stay relevant and competitive in the digital era.
While these investments are commendable, our analysis suggests that Walmart’s digital presence still pales in comparison to that of Amazon. Although the company has made significant progress in areas such as online sales penetration and supply chain automation, these developments are still in their nascent stages. As such, in our opinion, Walmart’s digital transformation is a long-term play and will take time to reach its full potential.
Looking ahead, we believe Walmart’s major challenge lies in its ability to balance its investments in technology and innovation with the need to preserve its low-cost value proposition. This is particularly important given the current economic uncertainty, which is prompting consumers to seek out deals and prioritize value. In our view, Walmart’s ability to maintain its low prices while investing in digital capabilities will be crucial to its competitive positioning in the future.
Our analysis suggests that Walmart is well-positioned to retain its status as a dominant player in the retail industry, despite the growing threat from e-commerce. Its wide economic moat, cost advantage, and commitment to innovation and technology are key strengths that, in our opinion, will enable the company to navigate the shifting retail landscape. However, the ongoing digital transformation presents both opportunities and challenges for Walmart, and its ability to successfully adapt to this new retail environment will be critical to its long-term success.
Financial & Valuation
Note: All historical data in this section comes from the company’s 10-K filings, and all consensus numbers come from FactSet.
Our analysis of Walmart’s recent financial performance and trends presents a mixed bag. While the revenue growth of 5.2% y/y to $160.8 billion and an EPS bump of 2% y/y to $1.53 in the recent quarter are encouraging, the market response was less than enthusiastic with the stock trading down 8.1%. However, the fact that these figures lined up with and slightly surpassed consensus estimates respectively indicates solid performance on the company’s part.
Over the past three fiscal years, WMT has seen consistent revenue growth with a CAGR of 5.3%. The sell-side consensus forecasts this trend to continue, albeit with a slight slowdown to 3.4% in the following fiscal year. Notably, WMT’s EBIT margin has remained flat over the past three years at 4.0%, but a slight expansion is expected in the upcoming years.
The company’s share dynamics are also worth highlighting. Over the past three years, WMT’s share count decreased by 5.3%. This suggests astute capital management on the company’s part, using share repurchases to offset dilution. This strategy, along with the revenue and margin trends, has led to an EPS growth at a CAGR of 8.5% over the past three years, outpacing its revenue growth. This trend is expected to continue, with consensus forecasting EPS to increase by 2.8% this fiscal year and by 9.3% the following year.
However, the company’s free cash flow margin has been declining, from 3.1% four fiscal years ago to an estimated 1.9% this year. Despite this trend, WMT still managed to generate an average FCF of $15,277 million over the past four fiscal years. The business is capital light, with capex as a percentage of revenue averaging 2.3% over the same period. The company’s return on invested capital is strong at 8.8%, which is a positive indicator of efficient capital use.
From the perspective of investors seeking income, the stock’s current dividend yield of 1.5% is marginally higher than the S&P 500’s yield. However, the stock’s performance over the past year has been lackluster, returning 12 percentage points less than the S&P 500.
Regarding its valuation, WMT is currently trading at a forward 12-month P/E of 22.3, slightly below its 5-year mean of 22.9. This is within its 2-standard deviation range of 19.3 to 26.5, indicating a medium valuation relative to its historical range. When compared to its peers, WMT’s valuation seems high, especially considering Target (TGT) and Home Depot (HD) are trading at forward 12-month P/Es of 14.7 and 20.0, respectively. Amazon (AMZN), however, trades at an even higher multiple of 42.2, but we believe Amazon’s valuation is mostly driven by its cloud business, AWS, so is not comparable, although many still believe Amazon is an e-commerce business.
Conclusion
As Walmart navigates the shifting retail landscape, its ability to balance its low-cost value proposition with significant investments in digital transformation will be crucial. The company’s wide economic moat, cost advantage, and commitment to innovation and technology present a solid foundation. However, successfully adapting to the evolving digital retail environment will be the definitive test for its long-term success. Despite its digital presence being in nascent stages compared to Amazon, Walmart’s ongoing initiatives signify a promising journey of digital transformation. While the retail industry’s competitive nature and the rapid shift to online shopping pose significant challenges, Walmart’s strategic focus and investment in its digital capabilities present opportunities for sustained growth and profitability.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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