Are you considering taking on a new stake in Walmart(NYSE: WMT) but are intimidated by the stock's recent run-up to record highs? It's not an unreasonable concern. It's almost always better to buy good stocks at a discount rather than a premium if you can.
This is one of these cases, however, where waiting for a better price could end up costing you more than it saves. Walmart shares are marching forward because the retailer is firing on all cylinders, and that's not likely to stop anytime soon.
If you're wondering specifically why the world's biggest retailer makes for such a great investment right now, though, here are the top four reasons.
1. Walmart's sheer size is a distinct competitive advantage
You probably already know Walmart is the world's biggest brick-and-mortar retailer. What you may not fully appreciate is just how much bigger it is. For perspective, this company operates over 10,600 stores all over the world, with more than half of them located outside of the United States. Its next-nearest competitor is Kroger with its 2,750 locales, while there are just under 2,000 Target stores.
Said another way, as big as e-commerce behemoth Amazon is, in terms of revenue, Walmart is still bigger.
Size isn't necessarily everything, of course. After all, big companies can be run badly too! Walmart is run very, very well, however, using its size and subsequent spending power to keep competitors in check by doing things those competitors simply can't afford to do.
2. The retailer's revenue "ecosystem" approach is working
You're likely familiar with the term "omnichannel," but if not, it's just a term used to describe how retailers meld their online and in-store shopping environment into a seamless experience for consumers. It's a phrase, however, that no longer accurately describes how smarter retailers like Walmart engage with shoppers. Increasingly, the industry creating new ways for consumers to purchase goods without even thinking about it; shopping with a particular store chain simply becomes part of a lifestyle.
Yes, Walmart's subscription-based Walmart+ program is an example of this lifestyle ecosystem. Although the company didn't cite a specific headcount, it did report double-digit percentage growth in the number of paying members, leading to 14.4% year-over-year growth in its membership income. And, given that Walmart+ members enjoy free shipping and delivery, it makes sense that last quarter's 22% year-over-year growth in e-commerce revenue was largely driven by this convenience-seeking crowd.
It's not just a matter of offering more convenience, though. Walmart monetizes its ecosystem in other ways, too. For instance, the company now allows its vendors and suppliers to pay to promote their goods being sold via Walmart.com. This advertising business's high-margin revenue was up 26% year over year last quarter and higher by 30% in the United States. The retailer also recently launched an effort to acquire television brand Vizio, which presents another platform from which to directly engage with -- and advertise to -- consumers. As of the most recent count, Vizio reported over 18 million active accounts/users of its television. It's going to be interesting to see all the different ways Walmart will wind up engaging with them.
Its enormous brick-and-mortar presence, of course, bolsters the usage of its online and out-of-store offerings.
3. Walmart is (finally) appealing to upper-income households
Prior to the COVID-19 pandemic, affluent households weren't exactly regular Walmart shoppers. Then, practicality set in. Once inflation began soaring in 2021, even households earning in excess of $100,000 per year were forced to start thinking about their budgets. Not only was Walmart more likely to offer what these consumers needed, it was more likely to offer it at a better price. For the next couple of years, the retailer regularly touted market share gains among this demographic.
Inflation is finally abating, however, leaving investors wondering if these newly won customers will continue shopping with the discounter.
Some won't, to be sure. But, given all that Walmart is doing to keep this crowd around, many of them likely will.
Take the company's overhaul of the in-store presentation of some of its apparel lines as an example. For decades its sales floors looked more like warehouses than a department store. Not anymore though. Seasonal and theme-based visual presentations (dressed mannequins, entire room setups on risers, branding backdrops, etc.) are now the norm, nodding back to traditional department stores' glory days by featuring in-demand brands and goods.
It's not just more compelling in-store presentations either. The retailer is adding higher-end brands to the mix as well. Reebok and Chaps are both recent premium additions to the chain's apparel lines, for instance. Premium wines are another once-unlikely addition to its store shelves that appeal to the higher-end crowd.
4. Walmart is resilient regardless of the economic backdrop
Walmart's business is well protected no matter what sort of economic environment we're in. Granted, that's largely because over half of its revenue is grocery-related. People must eat regardless of the cost of doing so, after all.
Even taking the must-have nature of the majority of Walmart's revenue out of the discussion, though, the retailer can still hold up to challenges. More than 10% of its top line comes from health and wellness products, and while roughly 25% of its sales comes from general merchandise that in theory could be economically sensitive, consumers will always need basics likes socks, office supplies, towels, kids' clothes, light bulbs, and the like. No other retailer is beating Walmart's prices on such items.
Or, think about it like this. Not once since 2017 has Walmart failed to produce quarterly revenue that was better than the year-ago comparison. That includes in late 2021 and early 2022 when the world was easing out of the pandemic which generated incredibly strong sales growth for the company just a year earlier.
Just keep it all in perspective
To be clear, investors shouldn't expect too much. Walmart will never be a high-growth stock like, say, Nvidia or Alphabet. Last quarter's top-line growth of just under 5% is in line with the company's likely long-term norm. There's only so much money consumers are willing and able to spend no matter how strong or weak the economy is, just as there are only so many places Walmart can profitably establish a store.
On the flipside, don't talk yourself out of a solid investment simply because Walmart stock is up as much as it is right now, or because the company itself lacks pizzazz. You don't invest for excitement. You invest for plausible growth. To the extent every portfolio needs some stability and predictability, this name offers plenty of both, and will likely continue doing so well into the future.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. James Brumley has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet, Amazon, Nvidia, Target, and Walmart. The Motley Fool recommends Kroger. The Motley Fool has a disclosure policy.
