Should investors buy into Walmart’s growth story?
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While AI stocks have been in the limelight this year, there are also others that are quietly benefiting from prospects for technology. Walmart Inc. (NYSE:WMT) for one, has gained more than 50% year-to-date, closing at above $80 on October 4. The S&P 500 index, which Walmart is on, has itself gained only about 21% this year. Walmart, based in Bentonville, Ark., is aiming to grow its e-commerce business and turning to AI to generate efficiencies. Overseas markets also offer further potential for growth.
Sam Walton opened the first Walmart in 1962 in Rogers, Ark. The store, which has since grown nationally and internationally through its strategy of pursuing “everyday low prices” and “everyday low costs” now boasts more than 10,500 stores and e-commerce websites in 19 countries. Should investors be buying Walmart’s growth story?
Guidance for fiscal 2025 year revised up
For the second quarter of its fiscal 2025 year, ended July 31, 2024, Walmart reported revenues of $169.3 billion, up 4.8% from the previous year’s second quarter. Earnings per share for the period, adjusted to reflect a three-for-one stock split this February, rose 9.8% over the year to $0.67 per share. And the company’s gross profit margin rose 0.43% to 24.4%. Comparative sales for U.S. locations open for the last 12 months (including e-commerce sales but excluding sales of fuel which is volatile) rose 4.3% (a decline from 6.3% for the previous year).
In the company’s earnings release, Doug McMillon, Walmart president and CEO, noted, “Each part of our business is growing – store and club sales are up, eCommerce is compounding as we layer on pickup and even faster growth in delivery as our speed improves. Our newer businesses like marketplace, advertising, and membership, are also contributing, diversifying our profits and reinforcing the resilience of our business model.”
The company’s three business divisions are Walmart U.S., Walmart International and Sam’s Club U.S.The Walmart U.S. division reports a 22% rise in ecommerce, including both store pickups and on-site delivery. Both ecommerce and store sales contributed evenly to Walmart International’s sales for the second quarter, with ecommerce sales rising 18%. The Sam’s Club U.S. division’s comparitive sales growth was led by the food and health and wellness categories (with the latter category benefiting from sales of GLP-1 drugs).
Walmart has also revised up its guidance for its 2025 fiscal year, forecasting net sales to grow in the 3.75% to 4.75% range from 2024’s $642 billion. It is also anticipating that its operating income will grow about 6.5% to 8% from the previous year’s $27 billion and forecasting EPS in the range of $2.35 to $2.43 (from EPS for the previous year, adjusted for the February stock split, of $2.22).
Ecommerce to boost growth, with help from international business
On the company’s second quarter earnings call, McMillon said, “Around the world, our customers and members continue to want four things: they want value; they want a broad assortment of items and services; they want a convenient and enjoyable experience buying them; and they want to do business with a company they trust. These four things are constant, but the way we provide them is changing and changing fast. The results we're delivering are due to real progress across these dimensions.”
With the pandemic leading to e-commerce growth, Walmart has been able to access additional customers who value the convenience of shopping from home.
As a result of this sort of convenient customer experience, Walmart’s e-commerce sales grew 21% over the year for the company overall. E-commerce growth has given Walmart’s customers more options, leading to growth in its newer businesses. It’s led to a 23% growth in Walmart’s membership income, McMillon said, with Walmart + membership up double digits and Sam’s Club U.S. achieving a “record high” membership. Moreover, membership growth in the second quarter was led by the younger Gen Z and millennial cohorts, which bodes well for the company.
The company’s global e-commerce losses continue to come down, reported John David Rainey, Walmart’s Chief Financial Officer, especially in its Walmart U.S. division and its India-based Flipkartbusiness. Walmart expects it ecommerce business to be profitable in the U.S. in the next year or two. In fact, core e-commerce was the “single-largest contributor” to the improvement in the company’s operating income over the year.
And events such as the “big billion days” sales event on Flipkart are expected to enhance the company’s international profitability in the second half. Internationally, there are markets where Walmart’s e-commerce business is currently profitable. The retailer is also looking to international markets to drive overall business growth.
The company’s e-commerce margins have also benefited from “another quarter of nearly 40% reduction in US net delivery cost per order.” According to Rainey, “As more customers are shopping with us more often across more categories, we're improving delivery density and transaction-level margins.” And a third of customers who choose the delivery option go for expedited delivery (across all income segments), compared to 10% for the previous year.
While the company is spending more on capital expenditure that it has been historically, the returns from these investments are pleasing, especially relating to the automation of Walmart’s supply chain. He expects these investments to lead to an increased return on the company’s invested capital each year.
According to Rainey, “By leveraging our scale as a global enterprise, we're finding savings in supplies, transportation, storage, third-party service contracts and various other expense categories. In other areas, we're maximizing the utilization of our assets and using technology to streamline our operational processes. Together, these efforts translate into meaningful savings.”
Moreover, the company is inclined to be more aggressive with its marketing, given the progress it has made on the ecommerce front.
AI enhances productivity
Walmart is also looking for ways to leverage generative AI to improve its customer and employee experiences. In addition to using data and large language models developed by others, Walmart is also building its own AI models. For one, the company is using AI to improve about 850 million pieces of data in its product catalog. According to McMillon, “Without the use of generative AI, this work would have required nearly 100 times the current head count to complete in the same amount of time. And for associates picking online orders, showing them high-quality images of product packaging helps them quickly find what they're looking for.”
Walmart customers and members, who can do AI-powered searches on the company’s app and website, now also can access a shopping assistant that gives them ideas and advice. For instance, they could ask the AI agent which TV works best for watching sports. Walmart expects that AI can also be used to help sellers on Walmart Marketplace have a more seamless experience. For instance, it can be used to provide brief answers so that they don’t have to sort through a lot of material. Also, AI helps make cross-category searches more effective, by bringing up more general merchandise items, thereby making for more ecommerce profitability.
According to McMillon, “The use cases for this technology are wide-ranging and affect nearly all parts of our business, and we'll continue to experiment and deploy AI and generative AI applications globally.”
Walmart also continues to automate its supply chain facilities and stores, making it easier for associates to locate merchandise.
Opioid-related lawsuits and multiple other risks
While Walmart is trying to sell its growth prospects, the retailer also faces multiple risks. For one, there is a Department of Justice case pending against the company implicating Walmart in “unlawfully dispensing controlled substances” from its pharmacies. The company is also involved in other opioid-related litigation filed by doctors, Native American tribes and various cities and counties related to the impacts of opioid abuse.
Walmart had previously agreed to pay out billions of dollars to settle similar lawsuits. Investors have also joined in the action and filed lawsuits against Walmart for lack of adequate opioid-related disclosures and against its directors and executives for breach of fiduciary duties in not adequately overseeing Walmart’s opioid prescription business.
Walmart also faces headline risk from matters related to treatment of its workers and had been implicated for resorting to bribery in Mexico. It faces the risk of cyberattacks to its information systems and is subject to various government regulations relating to matters such as data privacy, data protection and environmental policies. Walmart could also be negatively impacted by changes in government trade policy, such as imposition of tariffs on imported goods since a lot of Walmart’s merchandise is imported.
And Walmart faces competition from a variety of other retailers that operate both online and through store locations. The retailer touts its “everyday low price” and “everyday low cost” policies (whereby it promises customers low prices on sales and also to control costs and pass along the savings to customers) as competitive strategies. Selling online and offering pickup and delivery options, together with its Walmart + membership offering also help Walmart appeal to customers. Besides, the retailer is looking to further broaden its offerings in digital advertising, health and wellness and financial services.
Should you buy into the Walmart growth story?
Looking into Walmart’s financials, the company’s current ratio of 0.80 as of the second quarter is less than satisfactory, considering that its current assets don’t adequately cover its current liabilities. Its debt-to-equity ratio of 0.69 however shows that it has not taken on too much debt. And the company’s gross profit margin of 26.5% for the last 12 months compares favorably with the industry’s 23%. Walmart’s inventory turnover ratio, which indicates how efficiently it is turning its inventory into sales, was about 8.8 for 2024, which is less favorable than a retail industry average of 9.4.
Walmart’s book value per share of about $10.50 means that it is trading at more than seven times its book value, while its forward-looking earnings per share of $2.35 makes for a price-to-earnings ratio of 34. Based on earnings for the last 12 months, its P/E ratio is a less favorable 42, compared to the industry average of about 37.
According to CFO Rainey, “It really speaks to the earnings power of the business when you're generating double-digit incremental margins on a business that is growing north of 20%. You can just see, when you combine that with advertising and Data Ventures and Fulfillment Services and all these other faster growing, higher-margin parts of our businesses, that the enterprise operating margin wants to go up in our business.”
The stock is on the S&P dividend aristocrat index, which means Walmart has been steadily raising its dividends for at least 25 years in a row. The company has also rewarded its shareholders with multiple stock splits and is engaged in stock buybacks too. It seems Walmart’s growth story has a good foundation. While there may be other faster-growing stocks, Walmart’s steady dividend payments combined with growth prospects means that investors who favor stability could consider buying.
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Note: I do not own any individual Walmart stock and I do not intend to take a position in the stock within five days of publication of this article. This write up is my unbiased opinion and not intended as financial advice. All investments carry risks and you should talk to a financial advisor to learn about the suitability of an investment for your portfolio. I did not receive any compensation for this piece that influenced my views.