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Walmart: This Resilient Stock is Headwind-Resistant
Stock Analysis & Ideas

Walmart: This Resilient Stock is Headwind-Resistant

Story Highlights

Inflation has rattled Walmart, just like it has rattled many other businesses. However, the company’s influence in the retail industry has allowed it to maintain its pricing power and profitability. The current situation might be worrisome for investors, but Walmart’s generous dividend and share buyback plan make it an attractive investment over the long term.

Shares of Walmart (WMT) went on a tear during the pandemic. However, WMT stock’s lackluster performance since then says a lot about its supply-chain issues and the inflation rates affecting its bottom line. It operates a business where margin pressures can have a crippling impact on its long-term profitability. Nonetheless, WMT is known for its strength, and it has navigated through difficult times in the past.

Walmart is fighting fiercely, and though the winding down of the pandemic has resulted in increased spending at stores, rising costs are hurting the company’s profit margins.

Despite these challenges, though, we believe Walmart is attractive over the long term due to its resiliency and track record. We are bullish on its prospects.

Interestingly, however, WMT has a 6 out of 10 on the Smart Score rating on TipRanks. This indicates that the stock may perform in line with the overall market, going forward.

Walmart Had a Tough Fiscal Q1 2023

Walmart has been in business for decades; however, its vast experience hasn’t allowed the company to flee inflation and other macroeconomic issues. The company reported its Fiscal Q1-2023 results in May, and investors were not quite happy with the results.

Walmart generated revenue of $141.6 billion, which is well above the $138.9 billion expected by analysts. However, it missed analyst expectations when it came to earnings per share. The company reported adjusted earnings per share of $1.30 versus the $1.48 expected.

Furthermore, Walmart’s net income for the quarter dropped to $2.05 billion or $0.74 per share, compared with $2.7 billion generated in the same quarter the prior year.

The company’s top sales category, Grocery, was hit hard due to inflation. WMT’s CEO, Doug McMillon, said that the volatility in the food category was unexpected and reflected the unusual macro environment.

So, Walmart is selling low-margin items, such as bread and eggs, that don’t contribute much to the bottom line, especially due to rising input costs.

Despite the headwinds related to food prices, Walmart raised its outlook for sales this year. The company expects its net sales to increase by 4%. Previously, it anticipated a 3% increase. The bump sends a positive signal for investors on the fence with WMT. However, it reduced its profitability expectations, which implies that Walmart is struggling due to inflation.

Another issue surrounding Walmart is high supply-chain costs and increased inventory levels. The retailer pursued an aggressive procurements strategy to prepare itself for inflation, which resulted in Walmart’s inventory levels rising by 32%.

This might save the company from running out of stock or help it get ahead of inflation – but at a cost. Increased inventory implies that Walmart has to bear additional costs that might hamper its profits for the year.

However, on the brighter side, we must bear in mind that Walmart is a thin-margin business – which can be viewed positively. Despite launching numerous cost-cutting innovations, it has never yielded massive profit margins.

Hence, the “thin-margin” label will help Walmart continue to be a go-to for more price-sensitive customers, especially if inflation remains a concern. This plays well to Walmart’s strengths and will help the company retain customers.

Walmart Will Soon Become a Dividend King

Walmart’s quarterly reports have been confusing for investors. However, its dividend policy makes it highly attractive to investors. The company raised its annual dividend (paid quarterly) to $2.24 in its most recent quarter. This number depicts a 2% increase compared to the $2.20 dividend offered in the prior quarter.

Along with dividends, Walmart also plans to buy back shares for its 2023 Fiscal Year. In its Fiscal Q4-2022 earnings report, the retail chain revealed that it plans to purchase at least $10 billion worth of shares in Fiscal Year 2023. 

This news isn’t surprising, considering that Walmart bought back shares worth $9.8 billion in Fiscal Year 2022. The share buybacks should help increase the stock’s price during a time when the market remains in free-fall.

Wall Street’s Take on WMT Stock

Turning to Wall Street, WMT stock maintains a Strong Buy consensus rating. Out of 27 total analyst ratings, 22 Buys, five Holds, and zero Sell ratings were assigned over the past three months.

The average WMT price target is $156.11, implying 19.5% upside potential. Analyst price targets range from a low of $134 per share to a high of $181 per share.

The Takeaway – WMT Stock Should Bounce Back Eventually

Walmart’s perception of being an affordable brand will help the company grow in the near future. Currently, the company’s bottom line isn’t as attractive, primarily due to high supply-chain costs. Nonetheless, there are clear signs of Walmart bouncing back once inflation and recession fears are in the rear-view mirror.

Also, aside from Walmart’s fundamental growth, the company adds value to its stock through share buybacks and by paying out a steady dividend. Therefore, WMT is a stock that is worth considering.

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