Should You Hold Walmart (WMT)?

The #1 Fortune 100 company impressed investors with its latest earnings report.

Sales beat expectations while operating income surged.

The Wall Street Journal even did a piece recently on how the company earns more than $1.2 million a minute.

And financial pros are taking notice.

Search volume surged in the last two weeks, putting Walmart (WMT) in the top spot after sitting behind Target (TGT) for months.

Unlike consumer discretionary stores, Walmart offered a satisfying outlook.

Shares surged on the news, catching everyone’s attention.

There’s a lot to love here.

But is this just hype and hope or a real investment opportunity?

Walmart’s Business

When you think of retail giants, Walmart is probably the first name that comes to mind. And for good reason – this company is the largest retailer on the planet, with over 10,500 stores and clubs across 24 countries. 

With trailing 12-month revenue over $650 billion, Walmart’s massive scale allows it to offer some of the lowest prices around. That’s not always pleasant for suppliers who are regularly beat up for cost savings.

Each week, more than 230 million customers visit Walmart’s stores and digital channels to stock up on groceries, everyday essentials, general merchandise, and health & wellness products. 

Whether you prefer shopping at supercenters, discount stores, Neighborhood Markets, or Sam’s Club warehouse membership clubs, Walmart’s got you covered.

The company’s business is divided into three main segments:

• Walmart U.S. (66% of total revenue) – This is the company’s core mass merchant business in the U.S., operating under the Walmart brand
• Walmart International (23% of revenue) – Here, you’ll find Walmart’s operations in 23 countries outside the U.S.
• Sam’s Club (11% of revenue) – This segment includes the warehouse membership clubs in the U.S.

Walmart isn’t resting on its laurels – the retail giant is constantly adapting to stay ahead of the game. 

By heavily investing in eCommerce, expanding delivery options, and leveraging its vast network of stores, Walmart is ensuring that it remains convenient for customers to shop however they prefer. 

Strategic partnerships, like the recent one with Shopify, are expanding Walmart’s online product offerings, while the rapid growth of its advertising business, Walmart Connect, showcases the value of the company’s massive customer reach and data insights. 

In short, Walmart is making all the right moves to maintain its position as the world’s retail leader.

Financials

Source: Stock Analysis

In the first quarter of fiscal 2025, Walmart posted some impressive numbers. Total revenue jumped 6.0% year-over-year to $161.5 billion, while adjusted operating income surged 13.7% to $7.1 billion, thanks to strong sales, higher gross margins, and increased membership income. And get this – eCommerce sales skyrocketed 21% in the quarter!

Comparable sales for Walmart U.S. rose 3.8% during Q1, driven by strong performance in groceries and consumables. The company even managed to attract more high-income shoppers and saw a nice boost in its advertising business. 

This continues a +5% sales growth trend for the company – pretty high for a big box store.

Margins have increased slightly over the decade as ecommerce and supply chain efficiencies take hold.

However, free cash flow margin has compressed as Capex doubled from $10 to $20 billion from 2021 to 2024.

The $10 billion in free cash flow gets plowed back to shareholders through dividends and share buybacks, yielding around 1.9% overall.

Valuation

Source: Seeking Alpha

Walmart trades at a P/E and price-to-cash premium to fellow retailer Target, which has been plagued by issues in the last few years, as well as Dollar Tree (DLTR).

Yet, all three are far cheaper than high-growth Costco (COST).

At 14.6x cash flow, Walmart trades at 7.6% above its 5-year average.

Growth

Source: Seeking Alpha

Walmart’s growth numbers might not look so hot compared to some of its peers like Ollie’s Bargain Outlet (OLLI). And even three and five-year CAGR revenue growth are half Costco’s.

Yet, it’s on par with most retailers this and next fiscal year.

Profitability

Source: Seeking Alpha

Retail margins aren’t especially high. But with heavy volume, small increments matter.

Walmart’s EBIT and net income margins could be higher if they improved their sales mix. 

And we’ve talked about the recent boost in Capex, which has hurt free cash flow.

That’s brought down the company’s returns this year.

Our Opinion 7/10

Walmart is the best retailer outside of Costco in this group.

They deliver consistent performance year after year while always improving operations.

If the economy starts to move into a recession, we could see consumers begin to trade down on their purchases, boosting Walmart’s sales.

Nonetheless, we feel it is fairly valued at these prices, offering no real bargain.