Walmart: Outlook And Buybacks Were Disappointing (Rating Downgrade)
Contributor since 2012 / 11216 Followers
Summary:
- Walmart raised its FY 2024 guidance after delivering a modest Q3 results beat, but the updated full-year management outlook was below expectations.
- Walmart’s amount of capital allocated to buybacks shrunk from $3.0 billion in Q3 FY 2023 to $0.1 billion for Q3 FY 2024, which might indicate that WMT is fairly valued.
- I lower my rating for WMT from a Buy to a Hold after considering the company’s weaker-than-expected guidance and share repurchases.
Joe Raedle
Elevator Pitch
I have a Hold rating for Walmart (NYSE:WMT) stock.
Earlier, I reviewed Walmart’s financial performance for the first quarter of fiscal 2024 (February 1, 2023 to April 30, 2023) in my May 19, 2023, write-up. I draw attention to WMT’s latest quarterly financial results, forward-looking guidance, and its shareholder capital return in the current article.
I have made the decision to revise my rating for WMT from a Buy previously to a Hold now, in view of the lower-than-expected share repurchases for Q3 and the weaker-than-expected management guidance for FY 2024.
Analysts Initially Forecasted Revenue And Earnings Growth Deceleration For WMT In Q3
The market was anticipating that Walmart’s top line expansion and bottom line increase in the third quarter will be inferior as compared to prior quarters, before WMT announced its Q3 results on November 16 prior to trading hours.
The sell side saw Walmart’s top line expansion moderating from +8.8% YoY in Q3 FY 2023 and +5.9% YoY in Q2 FY 2024 to +4.7% YoY (source: S&P Capital IQ) for Q3 FY 2024.
Separately, Wall Street estimated that WMT’s YoY normalized EPS growth for Q3 FY 2024 will be +1.6%. In comparison, the company recorded relatively higher bottom line increases of +4.0% and +3.4% for Q2 FY 2024 and Q3 FY 2023, respectively on YoY terms.
In the subsequent section, I evaluate how WMT actually performed relative to expectations for the latest quarter.
Walmart Did Grow Slower In The Third Quarter And The Results Beat Was Modest
Walmart did achieve positive growth in revenue and earnings for Q3 FY 2024 despite tough economic conditions. However, WMT’s top line and bottom line grew slower vis-a-vis previous quarters like what the sell side predicted.
WMT’s revenue increased by +5.2% YoY from $152.8 billion for the third quarter of fiscal 2023 to $160.8 billion in the latest quarter. Normalized EPS for Walmart also went up by +2.0% YoY from $1.50 in Q3 FY 2023 to $1.53 for Q3 FY 2024. The company had delivered better top line expansion and earnings growth in the preceding quarter and the quarter a year ago as mentioned in the earlier section of this article.
On the other hand, Walmart’s key headline numbers for the most recent quarter surpassed the market’s expectations, albeit in a modest way. WMT’s actual revenue and non-GAAP adjusted EPS for Q3 FY 2024 exceeded the analysts’ consensus estimates by +1.4% and +0.7%, respectively as per S&P Capital IQ data.
In the company’s Q3 FY 2024 results release, the CEO outlined WMT’s value proposition by highlighting how it serves value conscious consumers by offering “great prices on fashion, toys, electronics, and seasonal decorations.” This explains why Walmart’s recent quarterly financial performance has remained relatively resilient in challenging times.
WMT’s Revised Full-Year Fiscal 2024 Guidance Disappointed Investors
The company’s shares corrected by more than -6% during pre-market trading on November 16 at the time of writing. One reason is that the +1.4% top line and +0.7% bottom line beats for WMT in Q3 FY 2024 weren’t significant. Another factor is that Walmart’s updated FY 2024 guidance wasn’t as good as what Wall Street expected.
In tandem with its Q3 FY 2024 results announcement, Walmart revised the company’s full-year guidance upwards, but to a lesser degree than what the market hoped for. The mid-point of WMT’s fiscal 2024 constant-currency sales growth and normalized earnings per share were increased by +100 basis points and +0.5% to +5.25% and $6.44. In contrast, the sell side had projected a +5.60% top line increase and a bottom line of $6.50 per share for Walmart in FY 2024.
As indicated in its Q3 FY 2024 results presentation, “continued pressure from its mix of products” was reflected in WMT’s updated full-year guidance. Walmart had noted in the company’s third quarter earnings presentation that it is experiencing “softness in general merchandise” especially relating to “discretionary categories including apparel, home, and toys.” As such, it is understandable that Walmart’s revised FY 2024 guidance didn’t live up to the analysts’ expectations.
Decline In Share Buybacks Could Send A Signal About Stock’s Valuations
Walmart’s share buybacks have been declining for the past couple of quarters as disclosed in the company’s recent Q3 results presentation. Specifically, the amount that WMT spent on share repurchases shrunk from $3.0 billion for Q3 FY 2023 to $1.2 billion, $0.7 billion, and $0.5 billion in Q4 FY 2023, Q1 FY 2024, and Q2 FY 2024, respectively.
Things got worse in the latest quarter, as WMT allocated a mere $111 million to share repurchases in Q3 FY 2024. This means that the company still has a substantial $18.1 billion buyback authorization.
It is important to understand how Walmart thinks about share buybacks, so that one can assess the implication of the contraction in share repurchases over the past few quarters.
At the Evercore ISI Consumer & Retail Conference on June 14 earlier this year, WMT highlighted that “you’ll see us be more opportunistic” on buybacks assuming that “we think our stock is undervalued.” Notably, Walmart’s consensus forward next twelve months’ normalized P/E multiple has expanded from its 2023 year-to-date trough of 21.9 times on January 19 to 25.2 times (source: S&P Capital IQ) at the end of the November 15 trading day.
Walmart appears to be fairly valued based on an evaluation of historical trading averages and fundamentals. WMT’s current P/E multiple at 25.2 times is about 9% above WMT’s five-year mean forward P/E ratio of 23.1 times. Separately, Walmart’s consensus FY 2024-2026 ROE forecasts in the 20.9%-22.4% range seem to be consistent with a fair P/E metrics in the low-to-mid 20s range which is where WMT is trading at now.
In conclusion, it is reasonable to conclude that Walmart’s stock has reached fair valuation, which has led to lower share buybacks for the company.
Final Thoughts
WMT’s near-term outlook has turned out to be weaker than what the market was expecting. Walmart’s shares also seemed to have gotten to fair valuation levels as evidenced by the sharp drop off in share buybacks. These factors point to a Neutral or Hold rating for Walmart in my opinion.
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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