Is There Upside To Walmart’s Stock?

[Note: Walmart’s Fiscal Year 2023 ends on January 31, 2o23]

After a 13% decline year-to-date (YTD), at the current price of around $125 per share, we believe Walmart stock (NYSE: WMT), the world’s largest retailer by revenue – could see more gains. WMT stock has declined from around $145 to $125 YTD, outperforming the broader indices, with the S&P falling about 21% over the same period. The retailer’s stock declines can be attributed to investors’ concern about rising costs and their effects on the company’s bottom line. In fact, WMT stock’s price-to-earnings ratio has been nearly halved since the beginning of the year to 27, making the stock’s valuation reasonable at present. We discuss this further below.

There are two sides to macroeconomic forces at work. Walmart’s spending is increasing at stores as consumers are shelling out on necessities such as groceries (which contribute to about 60% of its revenue) rather than experiences in times of inflation. But the same inflation is also eating into the retailer’s profits. With margins under pressure, Walmart made a decision to help lower the hit from growing inflation. The company announced that starting August 1 it would charge some suppliers a “collect pickup charge.” This pickup and fuel charge will be levied on Collect suppliers or those letting Walmart handle shipment pickup and delivery into the retail giant’s network. In other words, the company will exert its negotiating power with suppliers and raise prices, hoping suppliers absorb a significant share of the negative impact of inflation. The collect pickup charge will be calculated as a percentage of the cost of goods received by Walmart. Clearly, this situation puts Walmart in an advantageous position compared to other competitors who are passing along the higher costs to customers. While profitability growth may take a temporary hit in fiscal 2023, Walmart’s low prices will always draw customers.

In Q1, Walmart’s revenue rose 2.4% year-over-year (y-o-y) to $141.6 billion. The gains were driven by a 3% rise in the retailer’s U.S. comparable-store sales (excluding fuel) and a 10% jump in its Sam’s Club comps. However, Walmart’s international net sales fell 13% y-o-y, largely due to the company’s sale of its operations in the U.K. and Japan in the first quarter of fiscal 2022 last year. Obviously, more concerning were the higher labor costs and supply chain expenses that dented Walmart’s profitability. All told, Walmart’s GAAP earnings per share were down 24% y-o-y to 74 cents and adjusted earnings per share declined by 23% to $1.30. It is worth mentioning that the company was surprised by a sudden slowdown in consumer demand in discretionary categories in Q1. As a result, it was stuck with a glut of about 20% more inventory (worth almost $3 billion) going into the second quarter. That’s a sign that Walmart overestimated consumer demand.

Walmart reduced its profit forecast for the full year due to inflationary costs. In fiscal 2023, the company expects operating income and earnings per share to decline by roughly 1%. Previously, Walmart projected an approximately 3% increase in operating profits.

In light of rising interest rates and the threat of recession, the market at the moment is uncertain, but Walmart (relative to the market) is built to maintain its performance in periods like this. We have revised Walmart’s Valuation to $137 per share, based on a $4.81 expected EPS and a 28.5x P/E multiple for the fiscal year 2023 – almost 10% higher than the current market price. This implies that the company’s stock appears cheap at the current price. We forecast Walmart’s Revenues to be $595.6 billion for the fiscal year 2022, up 4% y-o-y.

While WMT stock looks poised for more gains in the future, it is helpful to see how its peers stack up. Check out how Walmart’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

With inflation rising and the Fed raising interest rates, Walmart has fallen 13% this year. Can it drop more? See how low can WMT stock go by comparing its decline in previous market crashes. Here is a performance summary of all stocks in previous market crashes.

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[1] Month-to-date and year-to-date as of 7/14/2022
[2] Cumulative total returns since the end of 2016