Walmart's latest earnings paint an interesting picture for the economy.
While stock markets have delivered strong returns over the past few years, the overall macroeconomic outlook is uncertain.
Inflation is abnormally high compared to historical standards. Additionally, a series of interest rate hikes by the Federal Reserve has had a major impact on consumer purchasing behavior. US employment data has also been inconsistent. Perhaps not surprisingly, some economists and investors are concerned that the US could be heading for a recession.
But after digestion Walmartof (WMT 0.13%) Following the latest earnings report, I was able to ease my fears about a recession. Let's analyze Walmart's stellar quarter and explore why the stock looks like a bargain right now.
The Importance of Same-Store Sales
One of the key performance indicators in retail is same-store sales, which gives insight into consumer purchasing trends at a particular location over a period of time. When this metric is increasing, it means that customers are returning to your store and becoming repeat customers.
The table below breaks down Walmart's same-store sales in each of its geographic markets for the first half of fiscal 2025. On the surface, these numbers may look mixed: Sales are accelerating in the U.S. and China, while Canada is somewhat flat and Latin America's results are more mixed.
position | 1st Quarter of FY25 | 2013 2nd Quarter |
---|---|---|
We | 3.8% | 4.2% |
Mexico and Central America | 9.2% | 5% |
Canada | 3.8% | 3.4% |
China | 12.5% | 13.8% |
Consumer resilience at its finest
But same-store sales are only part of the equation. A closer look at Walmart's other operating metrics shows how the retailer has become a top destination for consumers in these tough economic times.
When a retail business reports an increase in sales, it's important to understand what's driving the increase. For example, the increase in revenue could simply be due to inflation. If this is the case, it doesn't necessarily bode well for the economy. It essentially means that the main source of growth is passing on price increases to consumers. This model is not sustainable in the long term.
On the other hand, improving deal and sales volume trends may indicate that people are buying more goods at stores, which is a good thing because it suggests that shoppers like the variety of products in stock and may be accepting of your price range.
Walmart US saw a 3.6% increase in transactions and a 0.6% increase in average shopping cart size compared to the previous fiscal second quarter, which ended July 26. Additionally, its Sam's Club subsidiary saw a 6.1% increase in transactions compared to the previous year.
Walmart attributed the increases in transaction volume and average sale value to increased volume sales of produce, meat and beverage products, personal care and beauty products, increased pharmacy sales and food-related inflation.
To me, this is a pretty solid picture overall. While some of this growth is tied to inflation, Walmart's operating metrics suggest that customers are returning and buying more staples from the company.
Is Walmart a good stock to buy now?
The chart below shows Walmart's forward price-to-earnings (P/E) ratio over the past year: Investors can see that the company's forward P/E has experienced a dramatic valuation expansion, especially over the past few months.
In contrast, the S&P 500's forward P/E has fallen from a high of 28.5 earlier this year to a current level of 21.7. These trends paint a very interesting picture: while investors are becoming more bullish on Walmart, optimism about the overall market appears to be declining.
We don't know if the decline in the S&P 500 valuation index signals a full-blown recession. But the normalization could suggest that some investors are expecting an economic slowdown. After all, it's just too hard to say for sure if a recession is on the horizon.
I think Walmart has demonstrated the ability to attract and retain a large customer base across a variety of demographics and geographies, which should help the company slowly pave the way for new customer loyalty over time and strengthen its position as a leading retailer of consumer staples.
For these reasons, I believe Walmart is a great company to buy for the long term during these economically uncertain times, and I believe the company will continue to thrive with or without a recession.