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Walmart is often seen as an indicator of US retail and consumer behavior. No wonder: The company, which generated sales of $648 billion last year, is the country’s largest brick-and-mortar retailer in terms of sales.
Walmart’s strong second-quarter results and upwardly revised full-year guidance last week suggest good times are ahead for the company. But that’s not necessarily the best indicator for the retail sector as a whole. What’s good for Walmart is often bad for its competitors. Investors who are pushing up shares of other retailers like Target, Macy’s and Gap on Walmart’s earnings may have to brace for disappointment when more retailers report results.
Walmart’s size and business mix make it unique among U.S. retailers. First, Walmart has a huge U.S. grocery business that generated 60 percent of Walmart US’s revenue last year. Being a purveyor of low-cost groceries has proven to be a good position in the current climate.
Although the inflation rate in the U.S. has declined, daily life in America remains much more expensive than it was before the pandemic. For example, according to government data, food prices rose 25 percent between 2019 and 2023. They rose faster than housing, medical care and all other major categories except transportation during that period.
That means that even as American households forego everything from Big Macs and caramel frappuccinos to trips to Disneyland, bargain hunters still fill Walmart’s shelves. More middle- and upper-income shoppers are doing their shopping there. At the same time, lower-income consumers are buying more of the company’s own brands.
Walmart US’s like-for-like sales rose 4.2 percent year-on-year in the second quarter. At Home Depot, the only other major US retailer to report results so far, like-for-like sales fell 3.6 percent. The home improvement retailer expects the figure to decline by 3 to 4 percent for the full year. Walmart raised its forecasts for full-year sales and adjusted operating profit.
Selling groceries is a low-margin business. Walmart can keep grocery prices low because it has many ancillary businesses. Third-party online marketplaces, digital advertising, and membership programs like Amazon Prime – all of these are growing quickly and are more profitable. Few other retailers can claim to be able to do the same.
Walmart’s share price performance reflects this. The stock is up nearly 40 percent so far this year, hitting a new record on Monday. At 29 times forward earnings, Walmart also trades at a significant premium to the broader retail sector. Don’t expect that gap to close any time soon.
