Investors often see Walmart (WMT) as an indicator of US consumer sentiment. That’s because the company, which generated sales of $648 billion last year, is the country’s top-selling brick-and-mortar retailer, with 140 million weekly customers.
Over the past few weeks, investors have been trying to make sense of the ambiguous data on the state of the U.S. economy and consumers. Americans are traveling less and postponing major home renovations. Instead, consumers seem to be prioritizing essentials like groceries, which has given Walmart’s business a boost. Let’s take a closer look.
Walmart’s optimistic results and outlook
Walmart recently raised its full-year sales forecast as consumers shop for essentials and look for deals while cutting spending elsewhere.
The company now expects net sales to increase by up to 4.75% in 2024, up from a previous estimate of up to 4%. It also raised its operating income and profit targets. Walmart’s operating margin improved 20 basis points to 5.7% as efficiencies in digital fulfillment helped minimize e-commerce losses.
Each month of the second quarter remained relatively flat, and Walmart customers’ spending did not decline in July. Walmart said comparable U.S. sales rose 4.2% last quarter, excluding fuel. Analysts had expected a 3.4% increase for the metric, which tracks sales generated online and at stores open at least a year. The company reported adjusted earnings of 67 cents per share, beating the average analyst estimate of 65 cents.
Here’s a key point from the earnings report: Walmart’s sales of all merchandise (26% of total sales) rose after 11 consecutive quarters of declines! This category, which offers higher margins, has weighed on business in recent years as consumers have moved away from unnecessary items.
Finally, Walmart’s e-commerce business is doing well, with the company recording 22 percent growth in the United States. As an operator of around 4,600 stores, Walmart relies on its extensive store network to process online orders.
The company also invested in digital advertising, memberships, third-party online marketplaces and other, newer, higher-margin businesses. Growth in these areas helps Walmart reinvest in other parts of its operations. Advertising and memberships were the main drivers of operating profit growth. Membership revenue exceeded 14%.
Walmart’s booming grocery business
Walmart’s size and business mix make it a unique retailer. The company has a massive grocery business that generated 60% of its sales in the U.S. last year. The company has a dominant position in the domestic grocery retail market, with a 25% market share. That’s more than the combined market share of the next four largest grocery retailers – Kroger (KR), Costco, Target (TGT) and Albertsons (ACI) – which have a combined 23% market share.
Selling food at low prices has proven to be a godsend in the current economic climate. While the inflation rate in the US is easing, daily life in America continues to be more expensive than in pre-pandemic America. According to US government data, food prices have increased by 25% between 2019 and 2023. That’s a faster rate than the prices of housing, medical care and all other major categories except transportation during that period.
This has led to bargain hunters filling Walmart’s shelves. More middle- and upper-class shoppers are doing their grocery shopping there. At the same time, lower-class consumers are buying more of the company’s own-brand products.
Yes, selling groceries is a low-margin business. But Walmart can keep grocery prices low thanks to all the other ancillary businesses it runs. The aforementioned third-party online marketplace, digital advertising (up 30% in the U.S.), and Prime-like memberships on Amazon (AMZN) are all growing fast and very profitable.
Buy WMT shares
US consumers are definitely becoming more selective when shopping. People will buy items on sale and spend money during the sale, but will walk away if they feel the deal is not a good value.
This benefits retailers that offer essentials such as groceries and health products. Walmart’s sales of “health and wellness” products rose by a low double-digit percentage in the last quarter.
This is good for Walmart and clubs like Walmart’s own Sam’s Club, as well as Costco Wholesale(COST), which I previously recommended as a retail winner.
Walmart’s position in the U.S. retail industry is uniquely entrenched because many companies rely on Walmart’s access to customers to drive sales. For example, Walmart accounts for over 20% of the sales of consumer goods companies such as General Mills (GIS), Kraft-Heinz (KHC) and Clorox (CLX).
I believe Walmart is gaining market share not only in grocery but also in general merchandise due to its rapidly growing online marketplace (which includes a growing number of third-party sellers).
Walmart’s share price performance reflects this good news. The stock is up nearly 45% this year, hitting a new record high on August 22.
Also, keep in mind that Walmart is a Dividend Aristocrat and is on pace to increase its dividend for the 50th consecutive year. I expect the company to increase its dividend by a mid-single-digit percentage in the coming years. Walmart has had an average payout ratio of 40% over the past 10 years and typically uses the cash left over after investments, acquisitions and dividends to buy back stock.
WMT shares are a buy under $80.
As of the date of publication, Tony Daltorio had no position (either directly or indirectly) in any of the securities mentioned in this article. All information and data in this article is for informational purposes only. For more information, please see Barchart’s disclosure policy here.
