Walmart (WMT -0.80%) reported fiscal 2022 third-quarter earnings before the market opened on Tuesday. The results disappointed investors, and the stock price was down over 2% on the day of the announcement.
Even during normal economic times, it's a significant challenge successfully running a retail business that generates over $500 billion in annual sales. And these are anything but normal economic times. The coronavirus pandemic makes hiring people, managing supply chains, and getting customers in your stores difficult.
Given those less-than-ideal circumstances, it is actually impressive that Walmart still managed to increase sales.
Walmart sustains its sales growth momentum
Overall, Walmart reported comparable-store sales growth of 9.2% in its fiscal 2022 third quarter (ended Oct. 31). Recall that comparable-store sales figures count stores open for at least the previous 12 months. It excludes the impacts of store openings and closings and reveals a more informative look into customer demand.
Here's what CEO Doug McMillon said about Walmart's Q3 results:
Our momentum continues with strong sales and profit growth globally. Our omnichannel focus is pushing digital penetration to record levels. We gained market share in grocery in the U.S., and more customers and members are returning to our stores and clubs around the world.
Walmart benefited at the pandemic onset in early 2020 because it was allowed to stay open when many businesses had to shut down. Consumers had fewer places where they could spend their money, and so Walmart took a bigger share. In all, revenue increased by 6.7% for Walmart in its fiscal year 2021 (covering most of calendar year 2020). That's the fastest rate of growth for Walmart in the last decade.
The company is maintaining that momentum despite economies reopening worldwide and people having more choices on where to spend their money. That could be an indication of good long-term prospects for Walmart. It could very well be that during the pandemic, Walmart gained new shoppers who were pleased with its low prices and vast selection and may stick with Walmart longer than expected.
Walmart stock is not cheap
The market is far from convinced of Walmart's improving prospects. Its stock price is roughly flat year to date in 2021. Investors are still concerned about folks turning away from Walmart once the pandemic is in the rearview mirror. Consumers have dramatically shifted their spending habits during the pandemic, and there is no telling whether those habits will persist in the aftermath.
One of the most significant changes has been moving away from spending on services like haircuts, massages, and travel. Those have been replaced with spending on laptops, TVs, and game consoles. Of course, that change in consumer behavior benefits Walmart, but the reversal could cause the opposite.
To make matters worse for those interested in buying Walmart stock, it's not cheap at the moment. It's trading at a price-to-earnings ratio of 40 and a price-to-free-cash-flow ratio of 22.7, each near the higher end of the historical ranges of the last decade. It is indeed impressive that Walmart grew sales at 9.2% in Q3, but that's not enough to make the stock look like a good value at these prices.