Can Walmart’s Stock Cross $120 In Fiscal 2020?

Walmart (NYSE: WMT) has had a solid fiscal 2019 so far. In the first nine months of the fiscal year, the company’s revenues increased 3% year over year (y-o-y) to $376 billion, driven by growth in the domestic market due to its marketplace offerings. Walmart U.S. also delivered a strong top-line performance, with comparable sales of 3.5%, driven by customer traffic and growth in ticket size. However, the retailer’s stock fluctuated between $82 to $108 over the course of 2018, despite strong financial results. This was largely due to a relative slowdown in the company’s e-commerce growth in fiscal 2019 (ranging from 33% to 43% per quarter), from 50%+ levels in the first three quarters of fiscal 2018 ending January 2018. Walmart’s shareholders also seem to be concerned about the company’s shrinking margins and increased costs. 

We currently have a $103 price estimate for Walmart, which is about 10% ahead of the current market price. In this note, we analyze the factors that could result in further upside to our price estimate toward $120 levels in fiscal 2020 (year ending Jan 2020). We have created an interactive dashboard on How Can Walmart Reach $120 In Fiscal 2020? which details steps to arrive at our estimates. You can adjust the drivers to see the impact any changes would have on the company’s share price estimate.

Detailing Forecasts For Walmart

We expect Walmart to generate around $526 billion in revenues in fiscal 2020. Of the total expected revenues in fiscal 2020, we estimate $343 billion in the Walmart U.S. business, almost $119 billion for the Walmart International business, and nearly $60 billion for the Sam’s Club business. Further, we have calculated the retailer’s divisional revenues by estimating the number of stores, square footage per store and revenue per square foot in fiscal 2020. We expect Walmart ‘s fiscal 2020 store count in the U.S. to be over 4920, with average square footage per store of 146k and revenue per square foot of $477, translating into $343 billion (+3% y-o-y) in domestic revenues for fiscal 2020. In addition, we also expect close to 6390 stores in international markets, with an average square footage per store of 58k and revenue per square foot of $321, translating into $119 billion (flat y-o-y) in international revenues in the same period.

In order for the company’s valuation to see an upside of 20%, we estimate that the company’s revenues would have to increase slightly from our base case forecasts and grow to around $532 billion in fiscal 2020. Further, we also forecast the retailer’s net income margins to grow 20 basis points in our upside scenario, translating into net income of $17 billion.

We assign a P/E multiple of around 18x for Walmart and forecast its earnings to be nearly $5.70 per share in fiscal 2020 to arrive at our price estimate of $103. If Walmart is able to reach our upside case EPS of $6.10, a higher P/E multiple would be appropriate given the stronger growth prospects. An earnings multiple of 20x, coupled with the upside EPS would allow the company to cross the $120 mark in fiscal 2020. This all can be feasible if the company successfully increases its digital sales and expands its private label success further.

E-commerce has been on the rise in the last several years, thanks in large part to internet retailers. Consequently, it is necessary for brick-and-mortar retailers to pick up their digital initiatives to grow further. The retailer plans to expand its omnichannel capabilities by leveraging its strong supply chain and store network in the international markets as well. By fiscal 2020, we expect Walmart’s e-commerce sales to contribute about 4% of its total sales. While this figure is unlikely to be massive, it should help the company offset secular pressure on brick-and-mortar retail locations.

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