Is Walmart still a Consumer Staple Stalwart?「Earnings Season」

Walmart Inc., $Wal-Mart(WMT)$ will report Q1 FY 2023 (2023 due its fiscal year reporting timeline) before market open on Tue 17 May. Consensus earnings per share (EPS) estimate is $1.48 vs $1.69 (-12.4% year on year, y.o.y) and revenue is expected to reach USD $138.8 bil vs $138.3 bil (+0.4% y.o.y).

Walmart is a dividend-paying large-cap stock in the S&P 500 Consumer Staples sector, and among the top 10 largest companies with 4.4% weight in the sector index. WMT engages in retail and wholesale business through Walmart U.S., Walmart International, and Sam's Club. It operates supercentres, supermarkets, hypermarkets, warehouse clubs, cash and carry stores, discount stores, membership-only warehouse clubs, e-commerce websites, and mobile commerce applications.

Founded in 1945 in Bentonville, Arkansas USA, it now employs 2.3 million staff it called associates. Each week, about 230 million customers and members visit approximately 10,500 stores and clubs in 24 countries and eCommerce websites.

Its current tagline is helping people around the world “save money and live better” –anytime and anywhere, in retail stores, online, and through their mobile devices.

Walmart Performance FY2022

To give a sense of scale how huge WMT is, compare it to NTUC FairPrice, the ubiquitous and largest supermarket chain with 230 outlets in Singapore, which coincidently is also convening its AGM on 17 May. FairPrice’s revenue for the whole FY 2021 is just shy of USD $2.76 bil, or just a minuscule 2% of a WMT quarterly revenue!

Fundamentals Strengths and Risks

Brick-and-Mortar and e-Commerce Combo Winner

The biggest strength of WMT is its combination of brick-and-mortar and e-commerce business. It has spent billions building a seamless omni-channel experience for customers where they could buy on the app and have the goods delivered to their home or they can pick it up immediately from a store.

Walmart innovates to stay ahead. source: Walmart

It has the largest e-commerce market share at 6.6% over its closest competitors Target, Best Buy and Costco in the same segment, although it trailed massively behind Amazon (41%) in 2021. However, the latter doesn’t have the huge physical stores presence of WMT.

WMT share of e-commerce sales 2021 source: eMarketer, Statista

WMT also enjoys significant economies of scale due to its geographic reach and number of stores. With 4,742 U.S. locations, WMT is said to be within 10 miles of 90% of American, and customers would shop in WMT for sheer convenience. As inflation is at 40-year all-time high, WMT could leverage on its bargaining power with suppliers to mitigate the effects. These include either passing the cost to customers by increasing prices (as last resort), or offering consumers cheaper prices than competitors to maintain or grab market share.

Valuation and PE tug-of-war

With the recent stock price drop from all time high of $160.77 to current $148.05, WMT has become 35.8% undervalued versus its fair value of $230.65. It might present a buying opportunity if price is poised to recover with e.g. earnings catalysts (more on this later in the Technical section).

WMT is currently undervalued with recent price drop based on DCF models. Source: Simply Wall St

WMT stock price however is still fairly resilient compared to its competitors, the sector and the broader Market. In the challenging 2022 year to date, where SPX (proxy for Market) has entered correction with -16.11% decline in price, and its main competitors Costco $Costco(COST)$ and Target $Target(TGT)${{5c02b09fe5ee4ad2b960ab70447206fe}} in negative territory in the range of-5.27 to -12.25%, it has outperformed the Consumer staples index $Consumer Staples Select Sector SPDR Fund(XLP)$ -0.19%, with a +2.35% increase in price since the start of the year. See chart below.

WMT stock price versus main competitors, consumer staples sector and broader Market YTD

This resilience however made WMT stock price expensive as measured by price to earnings ratio. Investors need to pay a premium as WMT PE ratio is 29.8x versus the US Consumer retail average of 19.2x and the US market at 15.6x. There is a risk that investors might look for alternative investments vehicle to WMT.

WMT PE vs Industry and Market. Source: Simply Wall St

For medium-term risk, if inflation stays persistently high and needs prolong FED rate hikes to bring down, it might affect WMT’s ability to grow its revenue and disburse dividends. If dividend growth is slower than the rate of inflation increase, the real returns to investors would be decreasing over time.

The long-term risk for WMT is competition. Currently, it is enjoying a market leader position, but its peers are snapping at its heels. Online retailers such as Amazon and eBay as well as its traditional competitors Target and Costco will force Walmart to keep investing both in its stores, supply chain and online execution capabilities, to retain and grow market share.

Technicals Considerations

From longer term weekly chart, WMT has been on a multi-year uptrend since 2018. Even the COVID-19 pandemic did not severely impact the stock price. In fact, daily necessities from foodstuff, groceries, toiletries to toilet paper saw a spike in demand as consumers stock up on them in anticipation of lockdown and closure, and helped the stock price recover within weeks. Stock price however has been consolidating and range bound between $135 to 152 ever since mid 2020. There was a recent attempt to break out of the range in April, but price has since traded back within the range. As price is still trading way above 200MA, sentiment for the stock could be considered positive or at worst neutral for longer term.

Weekly chart WMT

From Daily chart, we could anticipate possible price action post earnings in both directions.

Daily chart WMT

For bullish scenario, with earnings beat and positive guidance, price could move to $152 (+2.42%) as first target. More bullish momentum could push price higher, and likely resistance is at around 20 MA of $153.53 (+3.70%).

For bearish scenario, with earnings miss and poor guidance, price could drop until 200MA to $144.71 (-2.26%). Further drop is possible to mid-point of the consolidation range around $143.60 (-3.01%).

All in all, based on Fundamentals and Technicals, $Wal-Mart(WMT)$ is still a consumer staple stalwart offering steady earnings and returns growth, although this is slowing in the near term higher inflation environment. Its share price is undervalued currently, and might offer opportunity to add some defensive plays to our portfolio, to ride out the Market downturn we find ourselves in.