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Could Walmart Be a Millionaire-Maker Stock?

By Demitri Kalogeropoulos – Jun 12, 2020 at 10:15AM

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Here's the case for sticking with a proven retailing winner.

Walmart's (WMT 2.18%) value-focused retailing model has produced many investor fortunes since the Walton family took it public in 1970. Today the chain is the biggest player in a massive global industry, with annual sales ringing in at over $500 billion in 2019 compared to just $78 million in 1972.

Sure, its biggest growth days are behind it now that Walmart counts its revenue in fractions of $1 trillion. But if the five decades between its public offering and today have demonstrated anything about the business, it's that it is flexible, efficient, and able to generate healthy shareholder returns through a wide range of selling conditions.

A shopping cart being pushed through a grocery aisle.

Image source: Getty Images.

Latest results

Those assets all showed up in Walmart's fiscal first-quarter earnings report that included a significant impact from the COVID-19 pandemic. The retailer confirmed its status as an essential source for consumer spending as shoppers turned to its stores to stock up on staples like groceries and home cleaning supplies. That demand helped the chain boost revenue by 10% in the U.S. market compared to Costco's recent 8% uptick .

Walmart's e-commerce business, which wasn't a big profit generator just a few years ago, became a key competitive asset in the period. Digital sales soared 74% thanks to ultra-fast fulfillment options like curbside pickup and same-day delivery. The chain also demonstrated impressive flexibility as consumer demands shifted wildly between staple products and more discretionary goods, including home entertainment merchandise.

Sparkling finances

The chain's finances took a hit from additional COVID-19 related costs such as extra labor and cleaning expenses. But Walmart still generated $7 billion of operating cash flow, double its prior-year result. Free cash flow was up by nearly $4 billion in the first quarter to $5.3 billion.

Some of its rivals put up better financial metrics in recent months. Dollar General, for example, enjoyed faster sales growth and higher profitability gains from pandemic shopping.

Walmart's wider product selection is usually an asset, but it became a slight drag on the business as consumer demand moved away from discretionary goods like apparel. Still, through unprecedented supply and demand stresses, Walmart showed investors how its big-box, multichannel approach can respond to quick changes in its shoppers needs.

The next few decades

Shareholders can't expect Walmart's recent double-digit sales increase to continue once stay-at-home restrictions are all lifted. Instead, revenue gains of around 3%, like it achieved in the latest full fiscal year, should be more common. Rival Kroger, for example, has been stuck at around 2% annual sales gains for the last two years.

But Walmart can generate strong overall returns from growth at that scale, especially since its likely to arrive with modest profitability gains, stock repurchase spending, and a dividend that today yields over 1.5%.

Put it all together, and there's a good chance Walmart shares keep outpacing the broader market over the long term, even if they don't do so by a wide margin. Yet in exchange for a slightly modest rally, shareholders would get benefits that include a stable, dominant global business that generates tons of excess cash. That performance could be enough to produce many more investor fortunes over the retailer's next five decades of existence.

Demitrios Kalogeropoulos owns shares of Costco Wholesale. The Motley Fool recommends Costco Wholesale. The Motley Fool has a disclosure policy.

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