Don’t Rush To Buy Walmart, Extra Low Prices Are On The Way

A Great Quarter For Walmart But Headwinds Are Growing 

Walmart (NYSE: WMT) had a great quarter. The problem we have with the stock right now is akin to what we’re seeing in Home Depot and other big-name retailers. The Q1 results were so good, even in the face of tepid employment gains, we suspect the next quarter won’t be quite so exciting. Not only is economic stimulus running out but weak labor gains and rising inflation don’t bode well for consumerism in general. We don’t expect to see Walmart flounder over the next quarter or year but we do see share prices struggling as the comps get tougher and YOY growth slows to a standstill. 

A Blowout Quarter For Walmart

Walmart had a blowout quarter with revenue up 2.7% from last year and 465 basis points better than the consensus. The 2.7% growth isn’t all that exciting by itself but it is on top of last year’s +8.7% comp which shows some lingering momentum in the consumer. The gains were driven by strong comp-store sales in the U.S. that were in turn driven by eCommerce. 

The U.S. comps increased 6.0% versus the 0.9% expected by analysts with eCommerce up 37% and contributing 360 basis points to the comp-store growth. eCommerce sales were strong across all channels and we don’t expect that to change. The ease and convenience of same-day pickup are without parallel. Sales at Sam’s Club were also strong at up 7.7% ex-fuel and 650 basis points above the consensus. 

Moving down the report the earnings picture is a little mixed. The company reported a slight gain in gross margins that was offset by higher operating expenses and flat YOY operating margin. The GAAP $0.97 in EPS missed by $0.26 but also includes the impact of recent divestitures while the adjusted $1.69 beat by nearly $.50. Looking forward, the company is expecting the strength to carry through into the end of the year and raised guidance but there is a caveat. Guidance is raised but the company is still forecast slowing sales growth, negative sales growth in the back half of the year, and a low single-digit decline in YOY revenue. 

The revenue guidance is offset by earnings guidance but even there we see a dark cloud. While EPS growth is expected to outpace revenue growth and come in positive for the year we see upward price pressure cutting into profits. The company says it is committed to keeping its prices extra-low and working with its supply chain to ensure that stays true but inflation is crawling into the economy fairly quickly. Not only is the cost of fuel on the rise but so is labor and materials costs and those will drive the cost of goods higher. 

The Walmart Dividend Isn’t In Jeopardy 

Walmart is a good company and on solid footing despite all this doom and gloom. The company has a solid balance sheet, ample cash, plenty of cash flow, and free cash flow, so we don’t see any threat to the dividend. At 1.55% the yield is a little low for our liking but we think the yield-to-value ratio will improve over the coming months. Regardless, investors can sleep well at night knowing this company has already declared the fiscal year’s dividends and should expect to see a 48th annual increase in early 2022. 

The Technical Outlook: Walmart Closes The Window, Shares Move Lower 

Shares of Walmart moved sharply higher following the Q1 release and closed with a gain for the day but we can only describe the price action as bearish. The price action opened near the top of an open price window, moved up to close the window, and then fell sharply lower to form a large red candle. Now, a day later, price action is indicated lower again with the broader market in retreat as well. If the stock doesn’t find support at the 30-day moving average we think shares of WMT could fall as low as $127.50 before finding a bottom.