With the Kroger-Albertson’s merger off the table, Walmart remains untouchable – analyst

With the Albertson’s (ACI)/Kroger (KR) merger terminated, BofA Securities sees less risk to Walmart’s dominance in the grocery segment as it’s unlikely any other chain can reach Walmart’s (NYSE:WMT) scale in terms of a national store footprint, buying power, supply chain efficiencies, and omnichannel capabilities.

As such, the bank reaffirms its Buy rating for Walmart (WMT) and $105 price target, which implies a 12% upside to Thursday’s close.

As the largest retailer in the U.S., Walmart (WMT) has more than double the market share in grocery compared to 12% for Kroger (KR) and 7% for Albertson’s (ACI), and at 60% of total sales, grocery is a significant share of Walmart’s overall business.

“We believe Walmart’s relative scale will continue to support stronger buying power with [consumer packaged goods] suppliers and its ability to maintain more competitive prices versus most grocery peers,” BofA’s Robert Ohmes said in his research report.

And while Walmart’s (WMT) ecommerce business is currently unprofitable, Ohmes expects it to reach profitability in the next year or so given efficiency gains and the ramp up of alternative profit streams, namely the company’s digital advertising business which reached $3.4B in 2023 and is expected to top $4B this year.

By comparison, Kroger (KR) and Albertson’s (ACI) digital ad businesses leverage loyalty programs and customer data but have lower EBIT and net margins. Furthermore, Walmart’s (WMT) advantage in digital advertising can also be attributed to its general merchandise assortment which enjoys higher margins than grocery as well as higher digital advertising potential.

While Wall Street analysts have an average Buy rating on Walmart (WMT), Seeking Alpha’s Quant rating and authors are more cautious, both of which rate the stock as a Hold, largely attributed to overvaluation with the stock up 80% this year versus 27% for the S&P 500.