I think last week’s 3.17% drop in Walmart (WMT) shares is an opportunity to buy the stock of a retailer that seem perfectly matched with this economy. Tariff increases, an up tick in inflation and a slowing economy have left consumers strapped and looking for bargains.
Think that might be a sweet spot for Walmart? The company’s second quarter results announced last Thursday argue that those conditions are just right.
Tariff-induced price hikes are attracting consumers from all income brackets looking for lower prices groceries and household essentials. Same-store sales for Walmart U.S. grew 4.6% in the second quarter year-on-year, exceeding the company’s projections. Its U.S. e-commerce businesses, which attracts a blend with more upscale consumers in the mix, surged 26%.
Walmart hasn’t noticed much pullback from its consumers because to date the impact of tariffs has been slow and gradual.That’s starting to change now as pre-tariff inventories have emptied and are replenished with tariffed goods. Costs are going up every week, CEO C. Douglas McMillon said on the company’s earning call, and will continue to rise in the third and fourth quarters.
To make up for the hit, big box retailers that sell a wide range of goods–and nobody sells a wider range than Walmart–can spread out the price increases, for example by adding margin to higher-priced goods like small kitchen appliances or apparel to offset higher wholesale costs on some grocery items, analysts note. The company has had about 7,400 price cuts across categories in the second quarter, about 27% more than the previous quarter, and it increased its rollback count in groceries by 30% over last year, McMillan said.
Meanwhile, the company reported, higher earners are turning to Walmart to trade down on discretionary purchases, leading to five consecutive quarters of growth. This quarter, general merchandise sales grew in every segment, particularly in apparel, media and gaming and automotive, McMillon said. It has also seen success with Bettergoods, a store brand that features organic and “healthier” products.
The company raised its guidance for full year sales growth in constant currency by 75 basis points to a range of 3.75% to 4.75% growth. Operating income guidance for the year remains at 3.5% to 5.5% growth. Second quarter consolidated gross margin increased 4 basis points on a reported basis and 9 basis points on an adjusted basis. Inventory globally was up 3.8% and up 2.2% in Walmart U.S.
Adjusted operating income grew about 0.5 percentage points in constant currency. Adjusted EPS rose 1.5% to $0.68. Wall Street analysts had expected earnings of 74 cents a share.
Walmart shares sold off last week as on that earnings miss in spite of the better than expected growth in revenue.
Even with the dip the shares sell for a not-cheap 36.54 times trailing 12-month earnings per share. The stock pays a 0.97% dividend.
My pick here is predicated on my belief that while the economy will slow the odds are that we won’t slide into a steep recession.
