With continued operating margin expansion and robust comparable sales growth, here’s what we think of Walmart stock.
Noah Rohr
Walmart WMT released its first-quarter earnings report on May 16. Here’s Morningstar’s take on Walmart’s earnings and stock.
Key Morningstar Metrics for Walmart
- Fair Value Estimate: $52.00
- Morningstar Rating: 2 stars
- Morningstar Economic Moat Rating: Wide
- Morningstar Uncertainty Rating: Medium
What We Thought of Walmart’s Q1 Earnings
- Walmart continued to robustly grow comparable sales, with its US segment posting a 3.8% gain and Sam’s Club increasing 4.4%. Impressively, growth was driven by gains in transaction volume in both segments. We think this captures Walmart’s resounding low-price value proposition, especially amid heightened economic uncertainty. Discretionary categories remain pressured, but the firm’s higher-frequency grocery category (about 60% of US sales) continues to expand. We expect the company to continue taking market share in the grocery category in the coming quarters.
- Operating margin for Walmart US expanded 10 basis points to 4.9%, and margins at Sam’s Club expanded 70 basis points to 2.9%. Even while higher-margin discretionary categories remain under pressure, we are impressed by the firm’s ability to deliver some margin expansion. We think this primarily stems from Walmart maintaining healthy inventory levels, limiting promotional markdowns, and growth in alternative profit streams such as advertising.
- E-commerce sales at Walmart US and Sam’s Club each grew by close to 20%. In recent years, Walmart has invested significant money to improve its digital ordering capabilities and revamp its overall brand perception via store remodels. While low prices remain its core value proposition, we think the company’s investments to improve the customer experience are paying off, as it continues attracting new customers to its stores and digital platforms. Management noted that recent market share gains come mainly from higher-income customer cohorts.
Walmart Stock Price
Fair Value Estimate for Walmart
With its 2-star rating, we believe Walmart’s stock is overvalued compared with our long-term fair value estimate of $52. The company delivered strong top-line growth in the quarter, as comp sales expanded 3.8% in the Walmart US segment and 4.4% at Sam’s Club (both of which exceeded our 3.5% estimate). Margins also proved resilient amid fewer markdowns and stringent inventory management, prompting a 30-basis-point expansion in companywide adjusted operating margin to 4.4% (versus our 4.1% estimate).
While we expect the remainder of fiscal year 2025 to be choppy as economic uncertainty and inflation pinch consumer wallets, we suspect Walmart should continue taking market share, as its low-price value proposition and omnichannel fulfillment capabilities resonate with consumers. As a result, we expect the company to deliver modest growth in transaction volume and low-single-digit price growth due to inflation. However, we expect the firm’s operating margin to remain pressured as its domestic sales mix leans toward the lower-margin grocery category. Our fair value estimate implies a forward fiscal 2025 price/earnings multiple of about 21.5 times and enterprise value/adjusted EBITDA of about 11 times.
Read more about Walmart’s fair value estimate.
Walmart Stock vs. Morningstar Fair Value Estimate
Economic Moat Rating
We believe Walmart has a wide moat, underpinned by its cost advantage and a ubiquitous brand associated with low prices in its domestic market. The company is the largest retailer in the United States, with over $440 billion in annual sales and a massive store footprint of over 4,600 domestic namesake locations. Despite the fragmented and competitive retail landscape, we surmise that Walmart has carved out an enviable position, benefiting from its proximity to the vast majority of US consumers.
We view Walmart’s seemingly unwieldy physical footprint as a strategic asset due to its entrenchment in US communities, which lets it serve customers through multiple channels. Furthermore, the firm leverages its unmatched scale by spreading its omnichannel and distribution investments over a wider sales and profit base, letting it adapt to the dynamic retail environment while maintaining robust profitability.
While the retail industry is cutthroat due to the virtual nonexistence of switching costs, Walmart has built a resonating brand in the US over the past five decades. In our view, its moat is predicated on the reinforcing flywheel between strong brand recognition that drives consumer foot traffic and unit sales and leverage over suppliers and a vast supply chain network to drive down costs. Consumers are attracted to Walmart due to its unique promise of a wide assortment of goods at low prices (we estimate its stores hold around 140,000 stock-keeping units compared with Target’s TGT 80,000 and Dollar General’s DG 10,000), which drives high transaction volumes and unit sales. Walmart can leverage its robust unit sales and retail presence to negotiate lower prices with suppliers. Consumers recognize its ability to stock shelves with low-priced goods, reinforcing traffic.
Read more about Walmart’s economic moat.
Financial Strength
We believe Walmart boasts a solid financial position. The firm’s $9 billion in cash on hand, $15 billion of undrawn lines of credit, modest outstanding debt, and history of positive operating cash flows let it continue reinvesting in the business while making shareholder distributions.
Walmart typically keeps its net debt/EBITDA level between 1.0 and 1.6 times, while debt/cash from operations has remained below 2.5 times. We view Walmart’s debt service payments on its $43 billion in debt as of its fiscal 2025 first-quarter-end as predictable, and its 10-year average interest coverage ratio of nearly 12 times is a formidable indicator that it can seamlessly manage its obligations. The firm’s debt maturities also appear adequately spread out, with most of its long-term debt coming due after fiscal year 2028.
Read more about Walmart’s financial strength.
Risk and Uncertainty
We assign Walmart a Medium Uncertainty Rating. The rise in e-commerce is the most formidable threat to the firm’s traditional brick-and-mortar retail model. While its sales are underpinned by grocery items (60% of domestic sales), which tend to be more insulated from online penetration, we surmise Walmart faces tough online competition for sales of general merchandise such as electronics, apparel, and home decor, which is unlikely to abate anytime soon.
Given the higher margins that merchandise sales typically carry over grocery, margin pressure could ensue over time if that business becomes a larger part of Walmart’s mix. Furthermore, Amazon.com AMZN has entertained expanding its physical presence in grocery beyond Whole Foods and Amazon Fresh. While we view this threat as low due to Amazon’s lack of physical storefronts, it is worth monitoring competition from the corporate behemoth.
Read more about Walmart’s risk and uncertainty.
WMT Bulls Say
- Margin pressure should abate as Walmart’s recent investments in omnichannel fulfillment and its third-party marketplace continue to scale.
- Walmart’s vast grocery offering insulates the firm from digital competition, given the perishability of the merchandise.
- Walmart’s recent investments in supply chain automation should drive margin expansion. The firm may also reinvest the cost savings to hold down prices and drive foot traffic to its stores—a benefit relative to many smaller retailers.
WMT Bears Say
- Walmart’s third-party marketplace and third-party fulfillment capacity pale relative to Amazon’s scale. We posit that Amazon can underprice Walmart on commissions, listing fees, and fulfillment services related to its marketplace.
- Sam’s Club has woefully underperformed Costco in recent years, and the brand does not provide a compelling value proposition that would allow Sam’s to take share.
- Walmart’s sales mix of higher-margin general merchandise categories stands to decline due to strong digital penetration, prompting long-term margin degradation.
This article was compiled by Leona Murray.
The author or authors do not own shares in any securities mentioned in this article.Find out about Morningstar’s editorial policies.
