24-7 Wall Street Insights

• For decades, Walmart (NYSE: WMT) has been one of America’s premier retail store chains. Its reputation for value, customer service and satisfaction set the bar during the early 1960’s, and has continued to grow to date.
• Walmart stock has had a strong run during 2024, reaching over $180 per share.
• Walmart enacted its first ever forward stock split in company history, a 3-for-1 split in May, 2024.
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Solid Growth and a Forward Stock-Split

Sam Walton’s popular Walmart stores have come to epitomize the traditional American entrepreneur values of common sense, thrift, work ethic, and value for the dollar. Based in Bentonville, AR, Walmart has grown from its humble retail beginnings in 1962 to become a half trillion dollar consumer goods colossus. 24/7 Wall Street regularly covers Walmart and has published numerous past articles on the company.

In the past 24 months, Walmart stock has been on a tear, going from $119 to $180 per share. In May 2024, perhaps in keeping with its principles of affordability, the company enacted its first ever forward stock-split. Walmart underwent a 3-for-1 split with the intent to keep the stock “affordable” for its employees.

On May 16th, Walmart announced its Q1 2024 earnings. Walmart store sales reported 3.8% growth, with its Sam’s Club warehouse priced outlets notching a 4.4% gain. Brick and mortar locations improved operating margins, and both Walmart and Sam’s Club e-commerce sales increased by nearly 20%. International sales reported at $115 billion, with potential growth opportunities in both China and India. Combined with a bullish indicator stock-split, one would think that continuing these kinds of results would be a unanimous consensus. But that would be wrong.

Retail Competition and New Market Headwinds

Domestic US:

While Walmart has dominated mass consumer retail chain selling for over a half century, it was relatively late in the game in attempting to compete with Amazon (NASDAQ: AMZN), Overstock.com (NYSE: BYON), and other online sellers in the e-commerce arena. Market penetration has improved, but there is admittedly a long way for Walmart to go to become a significant e-commerce rival. 

• Grocery sales has grown into a major revenue division for Walmart, amassing as much as 60% of domestic sales on its balance sheet. Amazon’s initial proverbial shot across Walmart’s bow was its acquisition of Whole Foods, with Amazon Fresh to follow. Some analysts see Amazon pushing further into the grocery realm to compete directly with Walmart. 
• Over the past few quarters, Amazon has changed its physical logistics operations by creating more warehouses and direct delivery services in major cities. Its ability to internally manage its fulfillment capacity dwarfs that of Walmart, which still relies on Federal Express.
• Sam’s Club has continually lost market share in the warehouse club sales field to Costco (NASDAQ: COST) for the past few years. Sam’s Club has not revealed any plans at the time of this writing that address this trend in any meaningful way.
• Walmart experienced a post-pandemic surge when lockdowns ended and people could shop in person again. However, the high rate of criminal pilferage at Walmart’s and other retail stores, especially in large cities, is persuading many shoppers to opt for returning to the safety of e-commerce.
• Walmart’s reliance on physical stores also comes with the costs of maintenance, security, real estate, and upgrades. A drop in foot traffic makes all of those expenses commensurately costlier. 
• Bullish Walmart analysts posit that the increase of higher end merchandise that appeals to a wealthier demographic will expand in the future to fuel higher earnings. Fearful customers, wealthy or not, will avoid stores if the threat perception is too high to warrant shopping in person. 

Assessing Fair Value

• Morningstar and other analysts calculate Walmart’s fair value estimate at the time of this writing to be $52 per share (split-adjusted).
• They believe that the current $67 split-adjusted price not only includes Q1 2024’s robust financials, but also the anticipated ones for the remainder of the fiscal year. Any earnings or revenue disappointments over the next few quarters could justify a selloff.
• The fair value estimate implies a forward fiscal 2025 price/earnings multiple of about 21.5 times and enterprise value/adjusted EBITDA of about 11 times.
• A Walmart selloff from $67 to $52 would equate to a 22% drop.

 

 

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