Why Walmart is Still a Buy at 52-Week Highs

Investors often see Walmart (WMT) as a bellwether for the U.S. consumer and how they are feeling. That’s because the company, which generated $648 billion in revenue last year, is the country’s biggest brick-and-mortar retailer by sales, with 140 million weekly customers.

In recent weeks, investors have tried to make sense of murky data on the state of the U.S. economy and consumers. Americans are pulling back on travel and deferring big 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 Bullish Results and Outlook

Walmart recently raised its sales guidance for the full year, buoyed by consumers buying necessities and seeking deals, even as they curtail spending elsewhere.

The company said it now expects net sales to rise by as much as 4.75% in 2024, versus its previous guidance for a gain of as much as 4%. It also raised its targets for operating income and profits. 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 consistent, and there was no pullback in spending by Walmart customers in July. Walmart said comparable sales in the U.S. rose 4.2%, excluding fuel, last quarter. Analysts had expected a gain of 3.4% for the metric, which captures revenue generated online and in stores open at least a year. The company posted adjusted earnings of 67 cents a share, topping the average analysts' estimate of 65 cents.

Here is a key highlight of its earnings report: Walmart’s sales of general merchandise (26% of overall sales) grew after 11 consecutive quarters of declines! The category, which has higher margins, has dragged on the business in recent years, as consumers pulled back from discretionary items.

Finally, Walmart’s e-commerce business is doing well, growing 22% in the U.S. As an operator of about 4,600 stores, Walmart relies on its vast network of stores to fulfill online orders.

The company has also been investing in digital advertising, membership, third-party online marketplace, and other, newer businesses that have higher profit margins. The growth of these areas is helping Walmart reinvest in other parts of its operations. Advertising and membership were major drivers of operating income growth. Membership fee income topped 14%.

Walmart’s Booming Grocery Business

Walmart’s size and business mix make it unique among retailers. It has a huge grocery business, which generated 60% of its revenue in the U.S. last year. The company boasts a dominant position in the domestic retail grocery channel, with a 25% market share. That is more than the total market share of the four next largest grocery channel retailers - Kroger (KR), Costco, Target (TGT), and Albertsons (ACI) - which have a 23% combined market share.

Being a seller of low-priced groceries has proved to be a sweet spot in the current economic climate. While the rate of inflation in the U.S. is easing, day-to-day life in America continues to be more expensive than in pre-pandemic America. Food prices went up 25% between 2019 and 2023, according to U.S. government data. That’s a faster rate than housing, medical care, and all other major categories, apart from transportation, during this period.

This has led to bargain hunters packing the aisles of Walmart. More middle- and higher-income shoppers are doing their grocery shopping there. At the same time, lower-income consumers are snapping up more of the company’s private-label food items.

Yes, selling groceries is a low-margin business. But Walmart is able to keep prices low on food because of all the other side businesses it runs. The aforementioned third-party online marketplace, digital advertising (up 30% in the US), and Amazon (AMZN) Prime-like memberships are all fast-growing and very profitable.

Buy WMT Stock

U.S. consumers are definitely getting more choosy in their purchasing. People are buying items on sale and spending during sales, but are walking away when they don’t feel like they’re finding good value.

That's benefiting retailers that cater to necessity-based items, such as grocery and health products. Walmart’s “health and wellness” products sales were up low double-digits last quarter.

This is good for the likes of Walmart and clubs like Walmart’s own Sam’s Club, as well as Costco Wholesale(COST), which I have previously recommended as a retail winner.

Walmart's position in the U.S. retail industry is uniquely entrenched, as many companies rely on Walmart's access to customers to drive sales. For example, Walmart comprises over 20% of sales for consumer staples companies, such as General Mills (GIS), Kraft-Heinz (KHC), and Clorox (CLX).

I believe Walmart is gaining market share not just in grocery, but also in general merchandise, due to its rapidly growing online marketplace (including a growing number of third-party sellers).

Walmart’s share price performance is reflecting this good news. The stock is up nearly 45% this year, and hit a new record high on Aug. 22.

Keep in mind, too, that Walmart is a Dividend Aristocrat, and is on pace to grow its dividend for the 50th consecutive year. I expect it to continue raising its dividend by a mid-single-digit rate in future years. Walmart has averaged a 40% payout ratio over the last 10 years, and typically uses any leftover cash after capital expenditures, acquisitions, and dividends to repurchase shares.

WMT stock is a buy below $80.