Walmart Stock (NYSE:WMT)
Walmart (NYSE:WMT) had a good first quarter, which was aided by management upping their FY24 estimate. However, in this piece, I believe that, while the expansion in its international markets, particularly in India, has been outstanding, it is unlikely to be sustainable. Furthermore, I suggest why, in the medium run, it is advisable to avoid Walmart stock from a value standpoint.
Highlights of the First Quarter
In my opinion, Walmart had a good first quarter. Revenues came in at $152.30 billion, up 8.56% year on year and above expectations by $4.31 billion. Adjusted EPS came in at $1.47, a 13.1% rise year over year, and above projections by $0.15. However, there is a caveat to the adjusted EPS figure: it eliminates the effects of a $0.85 loss experienced as a result of net losses on stock and other assets.
Management also highlighted a significant shift in sales mix, with customers focusing more on lower-margin categories like grocery and health & wellness and less on higher-margin categories like general items. As a result, operating margins have decreased. Despite this, management raised their FY24 target, with net sales expected to climb 3.5% and adjusted EPS expected to be in the $6.10 to $6.20 range.
E-commerce and Membership Growth Is Impressive
One of the most notable aspects of WMT’s Q1 performance was the strong growth in both e-commerce revenues and Sam’s Club memberships. Net sales from e-Commerce increased by 26% year on year, owing to the pickup and delivery channel. The segment’s operating income increased by double digits as well.
WMT’s online marketplace in the United States experienced a 40% year-over-year rise in seller count, which was one of the key factors behind the growth in the e-Commerce division, as well as a significant improvement in conversion rates.
According to PYMNTS, the e-Commerce portion of retail expenditure increased by 22% in the first quarter of this year, exceeding the 15% growth reported by the Census Bureau. Over the long term, eCommerce income is predicted to expand at a CAGR of 11.57% to $1.56 trillion by 2027. This bodes well for WMT, especially considering the company’s investment in and expansion of its e-Commerce channel.
Memberships increased as well, particularly at Sam’s Club. Sam’s Club memberships increased even again in Q1, with the division experiencing the highest quarterly membership sign-up on record. During the quarter, membership penetration also reached an all-time high. Furthermore, the company’s Walmart Plus membership program is benefiting from the development in e-Commerce, as indicated by the fact that 50% of Walmart Plus members came through the online pickup and delivery channel. Given that members spend more than non-members, the company’s unprecedented gain in membership bodes well for future sales.
China Could Be a Growth Story, but India Faces Significant Headwinds
WMT’s overseas markets grew strongly in Q1, particularly in China and India. During the quarter, both Walmart China and Flipkart, the Indian e-commerce business acquired by Walmart, witnessed double-digit revenue growth. Despite the fact that e-commerce penetration in China is just 40% and the Chinese economy has yet to reach pre-pandemic levels, the country has experienced double-digit growth. With six more Sam Clubs launching this year, China should remain a growth market for WMT, particularly when the economy reaches pre-Covid levels.
Despite its tremendous growth in India since acquiring Flipkart and acquiring a majority share in PhonePe, Walmart will face greater challenges in the long run. This is primarily due to the company’s expected rivalry with domestic player Reliance Industries, which is owned by Asia’s richest man, Mukesh Ambani.
According to Alliance Bernstein, the Indian e-commerce market will grow from $24 billion in 2018 to $133 billion by 2025, representing a $100 billion incremental opportunity given the market’s only three major players (Flipkart, Reliance Retail (Reliance Industries’ retail arm), and Amazon). According to the same analysis, Reliance Retail is anticipated to capture the bulk of the market share since it has the “most disruptive playbook,” thanks to its integrated approach to consumers, which Flipkart does not have.
Furthermore, non-Indian e-commerce corporations are prohibited from owning more than a 25% share in a vendor on their platforms under Indian legislation. Once again, Reliance has an advantage over WMT because the former can adopt the inventory model, providing it with greater control over inventory, price, and customer experience. WMT, on the other hand, can only use a marketplace approach. As a result, while WMT’s Flipkart is likely to grow in the next years, it is more likely to be capped due to Reliance Retail’s dominance and unfavorable regulatory environment.
Bringing in Higher-Income Customers Bodes Well for Future Margins
WMT was also effective in gaining higher-income customers during the first quarter. Because of the company’s development in its e-commerce activities, as well as the current macroeconomic context, a bigger proportion of this group was drawn to Walmart locations. This pattern, which began in the second quarter of last year, has been maintained in the subsequent quarters.
Furthermore, higher-income consumers shop not only for food but also for general products, and they purchase higher-priced items in both categories. While big-ticket purchases are slowing, the company continues to profit from higher-income clients’ hunger for high-priced necessities and their role in fueling e-commerce development.
The company anticipates adjusted FY24 EPS of $6.10 to $6.20. I’ve assumed that the expected FY24 EPS will be $6.15, which is the midpoint of management’s projection. The company presently trades at a forward P/E of 22.7x, which I believe is reasonable (Costco, for example, trades at 33.3x and Dollar Tree trades at 18x forward P/E, according to Refinitiv). Walmart stock has historically traded at a multiple of 22.4x. As a result, I used a forward P/E of 22.7x in my calculations.
WMT has a forward PEG ratio of 4.25x, implying a 5.34% profit growth rate. As a result, an EPS of $6.48 is expected for FY25.
With a projected P/E of 22.7x and adjusted EPS of $6.48, this would result in a price objective of $147, which is close to the company’s current trading levels. And, when the macroeconomic concerns that continue to plague the United States are considered, I believe it is better to wait for a more favorable price point before establishing a position in the company.
Bottom Line
WMT had a significantly stronger quarter than many predicted, as well as when compared to some of its peers. The company’s e-commerce channel is expanding rapidly, and it is also drawing higher-income customers, which can only help profits. While the company’s success in overseas markets has been excellent, particularly in China and India, the latter is likely to confront significant obstacles. Furthermore, present macroeconomic uncertainties remain unfavorable, and the stock is adequately valued from a valuation standpoint. As a result, it’s best to pass on this retail giant.
Featured Image: Megapixl
