Walmart's (WMT 0.39%) rise to becoming the world's largest retailer has made investors very rich over the years. Walmart's size, scale, and reach make it one of the most popular stocks among investors. But the retail landscape is changing, and Walmart is facing several headwinds that could give investors pause over its future. If you're wondering whether this stock is a worthwhile investment today, here's a closer look.
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Being big has its advantages
Primarily known for the everyday low prices offered in its supercenters, discount stores, neighborhood markets, and Sam's Clubs, Walmart serves a diverse range of retail customers. The retail sector, Walmart included, was hard hit at the start of the pandemic. But 2021 earnings show that Walmart has more than recovered, with comp sales growing 6.4% and e-commerce sales rising 11% year over year.
Total revenues for the company in 2021, including store sales and rental income from its leased properties, increased 1.6% after accounting for currency changes. While 1.6% isn't huge, it's a solid increase, given Walmart's size.
Many people think being the biggest is the best. There certainly are a number of advantages that come with a company Walmart's size, for example, having the ability to tighten profit margins to gain a competitive advantage over peers when it comes to pricing, inventory, or distribution. But being the biggest also means it can be challenging to grow.
Walmart has 210 distribution centers to help serve its 10,500 stores across 24 countries. This is a huge portfolio by any means, but less than in its recent past. In 2021, Walmart had $32.7 billion worth of divestitures from the business sales and the sales of stores and investments, mostly internationally. This is part of Walmart's bigger plan to reduce risk exposure in lower-performing markets and boost capital savings, which will likely pay off in the long run.
But the company still needs to find ways to grow its revenues. Walmart is attempting to attract and retain new customers through store redesigns, making improvements to the e-commerce experience, and expanding into the metaverse, but with margins being so thin in the discount retail sector, huge revenue growth is challenging to achieve.
Headwinds that could hurt Walmart
Supply chain issues have become a growing concern over the past year, with matters only getting worse as conflicts in Europe push energy costs higher. Walmart's supply chain costs were $400 million more than expected at the beginning of the fourth quarter, and this number will almost certainly increase in 2022.
Inflation is another big headwind that hurt revenues and sales for Walmart. Consumer spending is still strong, but as the costs for goods and services continue to climb, retail spending will likely slow, meaning less revenue for Walmart. Thankfully, being a discount store means people will likely be looking to spend less and save more as they shop, which could help drive more business to Walmart. But given the higher costs for its supply chain and transportation, any boost in revenues could easily be offset on its bottom line.
Giant footprint equals stagnant growth
Current headwinds may negatively impact performance in the years to come, but Walmart isn't going anywhere anytime soon. The stock is trading at a price-to-earnings ratio of 29, which makes it rather richly valued. Market volatility and future challenges could push prices back down closer to their historical levels, but only time will tell.
Investors should look at this stock as a reliable dividend payer in a recession-resilient industry and be comfortable paying an inflated price for it. However, those on the hunt for a value buy with better growth opportunities and fewer headwinds can find much better deals in the market today without compromising stability.
