In the ever-evolving landscape of the retail industry, Walmart’s (New York Stock Exchange:WMT)’s journey provides a compelling case study in resilience, diversification and digital transformation, as evidenced in part by its Q3 2024 results. This analysis examines a company’s performance in a broader context and The strategic moves and systemic changes that shaped its trajectory. The remarkable growth in global advertising and the surge in e-commerce sales are contributing to this story, but the story extends beyond these numbers. From dealing with unexpected expenses to strategizing for a more digitally focused business model, the company’s actions reflect a larger vision. This article delves into the broader dynamics shaping Walmart’s present and future, providing a deep perspective on Walmart’s competitive position in the global retail industry.
Third quarter shows continued execution amid challenges
In our view, the company’s financial performance in Q3 FY24 was strong. We are seeing growth in all segments. Walmart has raised its full-year sales forecast to 5% to 5.5% from the previous 4% to 4.5%, indicating the company’s confidence in its continued strong performance.
Walmart’s global advertising growth has been particularly impressive, growing approximately 20% in the third quarter. The significant increase in advertising revenue indicates the success of the company’s efforts to monetize its customer base and diversify its revenue sources. However, it is also important to note that this growth may be affected by cyclical trends and changes in advertising spending patterns.
On the negative side, Walmart pointed to an unexpected increase in SG&A expenses due to litigation costs and recovery costs associated with unplanned store closures due to hurricanes in Mexico. These unexpected expenses pose a risk to profitability, highlighting the importance of contingency planning and risk management.
Regarding the e-commerce business, Walmart US’s sales increased by 24% and Sam’s Club US recorded 16% growth. These numbers highlight the company’s successful transition to a more digital-focused business model. Walmart’s e-commerce growth, combined with its strong brick-and-mortar presence, positions it to take advantage of consumers’ evolving shopping behaviors.
However, Walmart believes it must continue to invest in digital capabilities to remain competitive in an increasingly online retail industry. The company’s recent efforts, such as expanding its marketplace and fulfillment services, are steps in the right direction, but will require continued investment and focus.
We’re also optimistic about Walmart’s approach to supply chain modernization. The company’s plans to automate its supply chain and implement a high-margin growth strategy could significantly improve profitability in the coming years.
The company’s third-quarter results also highlighted the value of diversification. Despite unexpected expenses and challenges, Walmart’s broad contributions across segments, markets, channels, formats and strategic growth areas helped cushion overall financial performance.
Looking ahead, Walmart’s outlook for the fourth quarter and beyond is cautiously optimistic. The company expects to expand its market share and expects profit and sales growth to boost profitability. However, it acknowledges potential headwinds such as an unstable consumption environment and wage inflation.
Our analysis suggests that although Walmart faces some challenges, it has a solid growth strategy and is well-positioned to take advantage of future opportunities. The company’s efforts to digitally transform, modernize its supply chain, and diversify its revenue sources should continue to drive growth and profitability. However, continued investment and strategic focus is critical to maintaining this momentum.
fundamental analysis
Our analysis shows that Walmart has many competitive advantages that put it at the forefront of the retail industry. Walmart has been able to maintain its position as one of the nation’s leading retailers for more than 30 years, given its vast physical footprint and strong position in the communities it serves. We believe this is a key competitive advantage that our competitors cannot easily imitate, despite the growing trend of e-commerce. But the company’s stronghold in traditional brick-and-mortar retail is being challenged by the rapid shift to online shopping led by other e-commerce giants such as Amazon (AMZN) and Shopify (SHOP).
One of Walmart’s big strengths is its competitive moat, which we think is wide. Our reputation for this is based on the company’s unique promise of low prices and a wide selection of products, a strategy that has allowed us to maintain a loyal customer base. This, combined with the company’s huge size, allows it to negotiate lower prices with suppliers and pass those savings on to consumers. We believe this cost advantage represents a significant barrier to entry for competitors.
However, in our view, Walmart’s position in U.S. retail is not without competition. The industry is notoriously competitive, with virtually non-existent switching costs for customers and the disruption caused by online penetration, particularly the accelerated rise of e-commerce giant Amazon. Traditional brick-and-mortar retailers’ business models are on the brink of obsolescence, and Walmart is no exception.
In response to these challenges, Walmart has invested heavily in technology and innovation to develop omnichannel capabilities. This includes leveraging its vast physical footprint and financial resources to create a seamless shopping experience for customers, whether they shop online or in-store. The launch of the Walmart+ subscription service and third-party online marketplace are prime examples of the company’s innovative efforts to remain relevant and competitive in the digital age.
While these investments are laudable, our analysis shows that Walmart’s digital presence still pales in comparison to Amazon’s. While the company has made significant progress in areas such as online sales penetration and supply chain automation, these developments are still in their early stages. As such, we believe that Walmart’s digital transformation is a long-term initiative that will take time to realize its full potential.
Looking ahead, we believe Walmart’s big challenge will be its ability to balance investments in technology and innovation with the need to maintain a low-cost value proposition. This is especially important given the current economic uncertainty, where consumers are increasingly seeking deals and prioritizing value. In our view, Walmart’s ability to maintain low prices while investing in digital capabilities is critical to its future competitiveness.
Our analysis suggests that Walmart is well-positioned to maintain its position as a dominant player in the retail industry despite the growing threat of e-commerce. We believe its broad economic moat, cost advantages, and commitment to innovation and technology are key strengths that will enable the company to navigate the changing retail landscape. However, the ongoing digital transformation presents both opportunities and challenges for Walmart, and its ability to successfully adapt to this new retail environment is critical to Walmart’s long-term success.
Finance and valuation
Note: All historical data in this section is from the company’s 10-K filings, and all consensus numbers are from FactSet.
Our analysis of Walmart’s recent financial performance and trends yields mixed results. Although sales were strong in the recent quarter with sales up 5.2% year-over-year to $160.8 billion and EPS up 2% year-over-year to $1.53, the market reaction was less enthusiastic, with the stock declining 8.1%. did. However, the fact that each of these numbers met and slightly beat consensus estimates indicates a solid performance from the company.
Over the past three fiscal years, WMT has experienced consistent revenue growth at a CAGR of 5.3%. The sell-side consensus is that this trend is expected to continue, albeit with a slight slowdown to 3.4% next year. Notably, WMT’s EBIT margin has been flat at 4.0% over the past three years, but is expected to expand slightly over the next few years.
The company’s stock price trends are also worth paying attention to. Over the past three years, WMT stock has decreased by 5.3%. This suggests prudent capital management on the company’s part, using share buybacks to offset dilution. This strategy and revenue and margin trends have resulted in EPS growing at a CAGR of 8.5% over the past three years, outpacing revenue growth. This trend is expected to continue, with consensus forecasting EPS growth of 2.8% for the current quarter and 9.3% for next year.
However, the company’s free cash flow margin has declined from 3.1% four fiscal years ago to an estimated 1.9% this year. Despite this trend, WMT was able to generate an average of $15.277 billion in his FCF over the past four fiscal years. The business is capital-light, with capital expenditures as a percentage of revenue averaging 2.3% over the same period. The company’s return on invested capital is high at 8.8%, which is a positive indicator of efficient use of capital.
From an income investor’s perspective, the stock’s current dividend yield of 1.5% is slightly higher than the S&P 500’s yield. However, the stock’s performance over the past year has been lackluster, with returns lagging the S&P 500 by 12 percentage points.
In terms of valuation, WMT is currently trading at a forward 12-month P/E of 22.3x, slightly below its five-year average of 22.9x. This is within a two standard deviation range of 19.3 to 26.5, indicating a moderate valuation compared to historical ranges. WMT’s valuation appears high when compared to its peers, especially considering Target (TGT) and Home Depot (HD)’s trailing 12-month P/E ratios of 14.7x and 20.0x, respectively. However, Amazon (AMZN) trades at an even higher multiple of 42.2x, although we believe there is no comparison since Amazon’s valuation is primarily driven by its cloud business, AWS. Many people still believe that Amazon is an e-commerce business.
conclusion
As Walmart navigates the changing retail landscape, its ability to balance a low-cost value proposition with significant investments in digital transformation will be critical. The company’s broad economic moat, cost advantages, and commitment to innovation and technology give it a strong foundation. However, their ability to successfully adapt to the evolving digital retail environment will be the decisive test for long-term success. Although Walmart’s digital presence is in its infancy compared to Amazon, Walmart’s continued efforts show a promising path to digital transformation. Although the competitive nature of the retail industry and the rapid shift to online shopping pose significant challenges, Walmart’s strategic focus and investment in digital capabilities is providing opportunities for sustained growth and profitability.