Walmart: A Poster Child For Resilience, Limited Upside Potential At Current Levels
Contributor since 2021 / 529 Followers
Summary:
- Walmart’s latest quarterly performance shows resilience and better-than-expected international segment performance.
- The company had a fantastic quarter with increased sales, improved margins, and strong growth in its advertising and eCommerce businesses.
- Flipkart, Walmart’s Indian e-commerce platform, showed strong growth and plans to enter the quick commerce space, bolstered by a recent investment from Google.
Oscar Gutierrez Zozulia/iStock via Getty Images
Investment Thesis
The last time I wrote about Walmart (NYSE:WMT), back in May 2023, I argued that despite an impressive performance both in its domestic market and internationally, from a valuation perspective it’s best to avoid the stock. I had a hold rating on the stock at the time. Since my article was published, the stock has jumped 33.3%, handily outperforming the S&P 500, which gained 25.5% during the same period.
In this article, I discuss the company’s latest quarterly performance and argue that despite my valuation concerns still existing, the resilience shown by the company in a challenging macro environment along with a better-than-expected performance of its international segment, makes it a much more attractive proposition compared to last time.
A Snapshot of Walmart’s First Quarter Performance
All things considered, in my opinion, Walmart had a fantastic quarter. Q1 revenues came in at $159.9 billion, up 5.92% y/y, and beating analyst estimates by $1.67 billion. Adjusted EPS came in at $0.60 and although this represented a decline of 59% y/y, it still beat analyst estimates by $0.07. Adjusted operating income jumped 13.7% y/y on account of higher gross margins and a significant growth in income from memberships. Both the advertising business and eCommerce business demonstrated strong growth, jumping 24% and 21% y/y respectively. The company also demonstrated its ability to manage its inventory in a disciplined manner, with global inventory decreasing by 2.7%,with the inventory of Walmart US decreasing by 4.2% y/y.
Management also offered guidance, which was strong yet prudent, in my opinion. For the second quarter, the company expects consolidated net sales to increase between 3.5% and 4.5%. Consolidated operating income is expected to grow in the range of 3% to 4.5% and adjusted EPS is expected to be between $0.62 and $0.65. For the full year, the company now expects to see all these three metrics to come in at the high-end or slightly above the company’s prior guidance. To offer more context, management had previously guided FY25 consolidated net sales to increase 3% to 4%, the consolidated adjusted operating income to grow between 4 and 6%, and adjusted EPS to be in the range between $2.23 and $2.37.
Walmart Displays Tremendous Resilience in the Face of a Challenging Environment
One of the key takeaways from WMT’s first quarter was the strong resilience shown by the company in the face of what has been a challenging macro environment. The last time I wrote about WMT, I did mention how the company was successful at attracting higher-income consumers. A year on since then, the US consumer has only gotten more pessimistic about the economy, as evidenced by the latest consumer sentiment report. Despite this, WMT was still able to deliver strong sales and margins, and this can be attributed to the company’s ability to keep attracting higher-income consumers. Management, during the earnings call, pointed to a higher degree of convenience offered by the company, which was driving higher-income households to shop with the company.
Walmart’s delivery business, which is where the company sees a higher concentration of higher-income households, saw strong growth as the company focused on improving delivery times without sacrificing the quality of products. For instance, in the company’s US segment, 20% of the 4.4 billion items that were delivered on the same or the next day in the last twelve months, were delivered in under three hours. Management, during the earnings call, also highlighted that delivery times were getting faster, and the delivery costs were going down, which subsequently boosted the shoppers’ convenience.
In addition to this, the strong growth seen in WMT’s membership income further demonstrated the company’s resilience. Sam’s Club US, for instance, set another record for member counts as well as membership penetration, which translated to membership income growth of 13%. Memberships in Sam’s China also saw a growth of 25% y/y. Finally, Walmart+, the company’s equivalent of Amazon Prime, grew double-digits again and is currently at an all-time high. Given that members tend to shop more and spend more than non-members, as long as the company can maintain this growth, it should help the company to keep boosting its sales and margins in future quarters. Memberships, along with other areas such as advertising, also helped boost the company’s operating income.
I am particularly impressed by Walmart+, which I believe would allow the company to continue to offer a “convenient” shopping experience. Features such as Mobile Scan & Go, currently used by a third of the members and one that is powered by AI, as well as Returns from Home and Early Access to deals, all are catalysts to attract more consumers to shop with the company. There was fear that WMT could fall victim to the current retail environment. Thanks to improved eCommerce, better quality of products, and attractive features through its Membership program, the company has managed to navigate through these choppy waters, as evidenced by a stronger-than-expected quarterly performance.
Flipkart Could Actually Be a Game Changer
Yet another major takeaway from this quarter was the strong growth seen in WMT’s international business, as the segment registered strong double-digit growth in sales and profit. The growth was primarily driven by Walmex, China, and Flipkart, the Indian e-commerce platform that was acquired by WMT.
I want to particularly focus on Flipkart, as I do believe that there are a lot of positives there. In my previous article on WMT, I warned about how the company could face headwinds in India on account of Reliance Retail, the retail arm of Reliance Industries, which is run by Asia’s richest man, Mukesh Ambani. While I still believe that to be the case, the recent performance of Flipkart gives me confidence that the headwinds might not be as bad as I initially feared. The company’s same-day delivery orders, which are now available across 20 major cities in India, grew by over 150% during the quarter, thereby demonstrating the strong underlying demand. Flipkart also generated a positive EBITDA during the quarter, making it two consecutive quarters of positive EBITDA growth. Furthermore, Flipkart, along with Walmex, WMT’s Mexican and Central American unit, was also the primary driver behind the company’s surge in its international advertising business, which grew 27% y/y during the quarter.
Flipkart now plans to enter into the quick commerce space, which involves two- or four-hour deliveries, as early as July, buoyed by the strong demand it is seeing there. While the company had held discussions to acquire one of the leading quick commerce firms, Zepto, which would have fast-tracked its entry, the talks were unsuccessful. Despite this, given the demand growth seen so far, I do believe that Flipkart can succeed on its own in a space that is expected to account for nearly $5 billion in gross order value in FY24, according to Goldman Sachs.
My conviction that Flipkart can succeed on its own was further bolstered by the fact that Google, earlier this week, announced that it is investing $350 million in the company as part of a $1 billion funding round. The investment would help Flipkart to leverage Google’s Cloud services, as well as enhance its digital infrastructure further by incorporating AI.
Revenues in the Indian eCommerce market, according to Statista, are expected to grow to $101.4 billion by 2029, at a CAGR of 11.45%. And thanks to Google’s investment as well as the company’s plans to enter the quick commerce market, I am reversing my earlier skepticism about Flipkart’s growth prospects. Mr. Ambani might still get the lion’s share, but Flipkart is set to stay as one of the major players in one of the world’s emerging superpowers. No wonder then that WMT International CEO Kath McLay was more upbeat about “exploring when will be the right time to IPO that business.”
Valuation
|
Forward P/E Multiple Approach |
|
|
Price Target |
$69.00 |
|
Projected Forward P/E multiple |
26x |
|
Projected Forward PEG Ratio |
2.32 |
|
Projected Earnings Growth Rate |
11.2% |
|
Projected FY25 EPS |
$2.64 |
Sources: LSEG Workspace (formerly Refinitiv), WMT’s Q1 Earnings Report, Seeking Alpha, and Author’s Calculations
The company expects adjusted FY25 EPS to now come in at the higher end or slightly above the previous guidance of a range between $2.23 and $2.37. Given that the Q1 adjusted EPS came in well above the previous guidance of a range between $0.49 and $0.52, and given the strong performance seen so far across different divisions and demographics despite the economic uncertainty, I have assumed the FY25 adjusted EPS of $2.37 for my calculations, the higher-end of the company’s guidance.
The company, according to LSEG Workspace (formerly Refinitiv), currently trades at a forward P/E of 26x, which makes it relatively cheaper than Costco (forward P/E of 47x) but more expensive than Target (15.1x). The stock is also expensive at current levels, relative to its own historical forward P/E multiple of 23.1x. If the company manages to hit $2.37 in adjusted EPS, which is my base case, then it would translate to an earnings growth of 24% y/y, nearly three times the average of analyst estimates of the company’s long-term earnings growth of 8.1%. Given this growth, I have assumed a forward P/E of 26x for my calculations instead of its historical multiple.
According to Seeking Alpha, the forward PEG ratio of WMT is 3.49, slightly below its 5-year average of 3.75 but well above the sector median of 2.32. While I don’t believe that WMT will keep generating earnings growth of 24% in FY26, I believe that it would be much higher than 7.5% earnings growth, which is what we would get if we assumed a PEG ratio of 3.49. On the other hand, if I assume a PEG ratio of 2.32, the industry median, it would result in an earnings growth of 11.2%, which is a more reasonable estimate, in my opinion, given that I believe that trends such as the ability of the company to attract high-income consumers as well as its rapidly growing advertising business should keep offsetting the challenging macro environment. As such, I have assumed a forward PEG ratio of 2.32, and subsequently an earnings growth of 11.2% for my calculations. At this earnings growth, FY26 is projected to come in at $2.64.
A forward P/E of 26x and an EPS of $2.64 would result in a price target of $69, which suggests a limited upside of about 6% from current levels. The limited upside is unsurprising given that the stock price climbed by a combined 8% in two days following its earnings and also managed to hit an all-time high. The stock has been up nearly 24% YTD and has strong momentum, as evidenced by its A Grade on Seeking Alpha’s Momentum Score. As such, don’t be surprised if the stock continues to scale new highs in the short term. All things considered, however, I continue to maintain a Hold Rating on the stock.
Risk Factors
Despite consumer confidence breaking a three-month streak of declines in May, consumer sentiment continues to tumble as the US consumer remains fearful about sticky, persistent inflation. The University of Michigan Survey of Consumers sentiment for May registered an m/m decline of 12.7% and the one-year inflation outlook jumped to 3.5%, the highest level since November 2023. As such, investors need to be cautious about the sustainability of WMT’s revenue growth, a point acknowledged by the management, when they said that they are going to “be patient on this performance,” and that “we are in far from a certain environment around the consumer.”
Furthermore, while the company’s planned acquisition of Vizio should provide the company with a better platform to compete with the likes of Amazon in advertising, the acquisition is yet to be completed. The FTC has begun its antitrust inquiry, and the company expects the transaction to be “slightly dilutive” to EPS in the near term. While the company expects the deal to be completed in FY25, the extent of FTC’s investigation could play a spoilsport to the company’s plans, a factor that investors should consider.
Concluding Thoughts
WMT had a fantastic start to the year, as a focus on convenience allowed it to attract consumers across different categories, which subsequently translated to better-than-expected top and bottom-lines. The resilience shown by the company can be primarily attributed to the ability of the company to continue to cater to higher-income households through efficient delivery and attractive features via its Walmart+ membership program.
Furthermore, the company’s international business also demonstrated strong growth, driven primarily by the likes of Flipkart in India. The Indian subsidiary continues to defy the odds and the investment from Google should allow it to compete better with the likes of local rivals such as Reliance Industries as well as Amazon.
Although there is limited upside from current levels from a valuation perspective, the strong momentum seen in the stock together with the resilience demonstrated by the company in a challenging backdrop makes it a strong conviction idea for the long-term.
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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