Source: PaxForex Premium Analytics Portal, Fundamental Insight
It's been a tough week for Walmart. On Tuesday, the retail giant's stock fell 11.4%, its biggest single-day decline since 1987. And on Wednesday, the stock fell another nearly 7 percent, falling along with the market as a whole.
The consumer goods giant came under fire for failing to meet earnings expectations and lowering its profit forecast for the rest of the year. To be sure, the double-digit drop is disappointing, but there are several reasons why the quarter wasn't as bad as it may seem.
Like most U.S. companies, Walmart is struggling with inflation and supply chain pressures, and labor shortages are making it difficult for the company to grow profits. Walmart raised salaries for front-line employees last year but is still struggling to fill key positions.
A few weeks ago, the company announced a starting salary increase for truckers to $110,000, nearly double the national average wage, according to Glassdoor. The Wall Street Journal also recently reported that the company is having trouble filling store manager positions, despite offering a $200,000 salary. Walmart acknowledged that payroll pressures were the main reason that Walmart U.S. operating margins fell by almost a percentage point to 4.6 percent or $4.5 billion in operating income.
But even though adjusted earnings per share fell from $1.69 to $1.30 this quarter, those numbers are still better than they might seem. Most of Walmart's competitors have yet to announce earnings, but Amazon reported an operating loss of more than $1.5 billion in its North American e-commerce business, a sign that the company faced tough headwinds in the form of inflation and overcapacity after ramping up during the pandemic.
There were a few positives, too. Walmart U.S. grocery sales grew by double digits, thanks in part to inflation, and Walmart also increased market share in this key category, which accounts for most of its revenue. The company, known for its "daily low price" model, has traditionally been resilient to recessions and sees them as an opportunity to gain market share. Gaining market share is more important to the company's long-term performance than increasing quarterly profits through price increases, and investors should support a strategy that focuses on gaining market share rather than short-term profits.
Sam's Club also continues to post impressive results, with comparable sales up 17%, or 28.1% over two years. E-commerce sales at the club chain are up 22%, and membership revenue is up 11%. Profits at Sam's were also down, but this top-line growth should pay off in the long run, and it shows that Walmart has successfully turned around a business that has long had a negative impact on overall results.
While it's no surprise that the stock fell on the back of a dip in earnings and lower projections, the reason for Walmart stock's double-digit drop may have less to do with the results themselves than with its valuation at the time of the report.
Before the first-quarter report, Walmart was actually in profit for the year, up 3% for the year, compared with a 14% drop in the S&P 500. After Tuesday's drop, Walmart stock was still ahead of the broad market index, down 9% for the year.
With management now expecting adjusted earnings per share to be unchanged from last year at $6.46, Walmart is trading at a projected price-to-earnings (P/E) ratio of about 20, nearly matching the P/E of the S&P 500. Walmart, a slow-growth consumer stock, typically trades at a significant discount to the S&P 500, but investors this year have invested in consumer stocks seeking refuge from general market volatility, abandoning growth and technology stocks. Walmart now has roughly the same earnings estimates as Alphabet, although Google's parent company is growing much faster than Walmart.
So Walmart's stock decline on Tuesday seems to be a sign that the pendulum has swung too far as investors try to prepare for a potential recession. The stock reaction shows that growth stocks have become too cheap at this point, and safe-haven stocks like Walmart are too expensive.
For Walmart itself, fiscal 2023 promises to be a tough year, but the company should emerge from the current volatile situation in a stronger position. Nonetheless, without the usual discount on the S&P 500 valuation, the stock will be hard to beat in the near future.
As long as the price is below 128.00, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 118.94
- Take Profit 1: 115.00
- Take Profit 2: 109.00
Alternative scenario:
If the level of 128.00 is broken-out, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 128.00
- Take Profit 1: 137.00
- Take Profit 2: 145.00
