As the world’s largest big-box retailer, Walmart Inc. (NYSE:WMT) has economies of scale that few can match. With approximately $573 billion in global revenues and $429 billion in wholesale purchases, the company has incredible buying power. Its infrastructure assets include 210 distribution centers, a fleet of 9,000 tractors, 80,000 trailers and more than 11,000 drivers. Each distribution center is more than 1 million square feet in size and employs approximately 600 personnel unloading and shipping over 200 trailers daily.
The company has approximately 230 million customers and members that visit 10,500 stores and clubs under 46 store brands in 24 countries and various e-commerce websites. Walmart employs about 2.3 million people on a worldwide basis.
While Walmart is not immune to cost pressures, as shown by its latest earnings results, I believe its competitive advantages and growth efforts will continue to prove enduring in the long run.
E-commerce
Walmart is investing heavily in the e-commerce space and is second only to Amazon (NASDAQ:AMZN) in terms of online revenues. However, Walmarts e-commerce growth rates have been higher than Amazon’s lately with a two-year stacked growth rate of approximately 90%, which includes the pandemic-driven e-commerce growth. Online websites include brands such as Walmart.com, Samsclub.com and Moosejaw.com domestically and Walmart.com.mx and Asda.com in international markets, just to name a few.
Financial review
The company most recently reportd earnings for its first quarter of fiscal 2023 on May 17, which showed good revenue growth but disappointing operating income results. Total revenue increased 2.4% to $141.6 billion (2.6% in constant currency). Growth was negatively affected by $5.0 billion due to divestitures and $400 million from currency exchange
Management stated, Across our businesses, we had a strong topline quarter. Were grateful to our associates for their hard work and creativity. Bottomline results were unexpected and reflect the unusual environment. U.S. inflation levels, particularly in food and fuel, created more pressure on margin mix and operating costs than we expected. Were adjusting and will balance the needs of our customers for value with the need to deliver profit growth for our future.
U.S. comparable sales grew 3.0% and 9.0% on a two-year stack basis. E-commerce growth was 1%, or 38% on a two-year stack basis. Sams Club comp sales increased 10.2%, or 17.4% on a two-year stack. Walmart International net sales were $23.8 billion, a decrease of $3.5 billion, or 13.0%.
The consolidated gross profit rate declined 87 basis points primarily due to Sams Club, with Walmart U.S. accounting for just a 38 basis points drop, largely due to elevated supply chain costs and product mix. Operating income on a constant currency basis declined 22.7% from the prior-year period.
Valuation
Consensus earnings per share estimates for Walmart are $6.43 for this fiscal year and $6.97 for the following year. Walmart sells at valuation levels somewhat above historical averages, as well as for large mature retailers.
However, the company is continuing to invest heavily in e-commerce, and some analysts estimate that on a stand-alone basis, the digital business is losing approximately $1 billion annually. If we assume that this digital investment spending creates long-term value and future growth opportunities for Walmart, then the current valuation multiples may not be excessive.
The company currently pays an annual dividend of $2.24, which equates to a 1.70% dividend yield, slightly above the S&P 500’s dividend yield.
Using the GuruFocus DCF calculator with an 8.0% long-term earnings growth rate, the stock appears to be worth approximately $140 per share, though I do realize this is an optimistic estimate.
Guru holdings
Gurus that have added to their stakes in Walmart over the past six months include Ray Dalio (Trades, Portfolio) and Jim Simons (Trades, Portfolio). Gurus who have reduced their holdings recently include Joel Greenblatt (Trades, Portfolio) and Bill Gates (Trades, Portfolio).
Conclusion
Walmart appears to be fairly valued at current levels in my view. However, this years earnings will likely be depressed due to inflationary issues. For investors looking out past the next few years, its likely the stock will continue to show strong gains over time. The company has strong brand awareness, international growth and an asset-heavy infrastructure base that will not likely be duplicated by the competition.
This article first appeared on GuruFocus.
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