Supermarket-retailer Walmart (WMT +0.76%) impressed investors on Thursday morning. The company reported revenue and adjusted earnings per share well beyond the consensus analyst estimates for the two key financial metrics.
Highlighting how Walmart seems to be bucking a challenging macroeconomic environment, first-quarter sales growth actually accelerated, compared to the company's growth rate in the fourth quarter of 2022. Further, double-digit growth in Walmart's adjusted earnings per share showed how the company is leveraging expenses and expanding its operating margin.
With the company's impressive business performance despite high inflation and interest rates pressuring the consumer, some investors might be taking a closer look at the stock to see whether it's a buy or not. Let's take a look.
NASDAQ: WMT
Key Data Points
A strong quarter globally
Walmart's first-quarter revenue rose 7.6% year over year -- an acceleration from the 7.3% growth in the fourth quarter of 2022. Same-store-sales growth rates "were strong globally," said Walmart CEO Doug McMillon in the company's first-quarter earnings release. Notably, one key to Walmart's growth was a 26% year-over-year increase in e-commerce sales.
With sales growing nicely and Walmart's operating margin expanding during the quarter, adjusted earnings-per-share growth outpaced revenue growth, rising more than 13% year over year. As management explained during Walmart's first-quarter earnings call, cost leverage exceeded management's expectations for the period.
It's worth calling out Walmart's rapidly growing advertising business. Sales from its global advertising business increased 30% year over year. As one of the company's higher-margin initiatives, the rapidly growing segment is good for Walmart's operating margin.
With such strong results in the rearview mirror, management lifted its outlook for full-year fiscal 2024 adjusted earnings per share. Previously, it was expecting these earnings to be between $5.90 and $6.05. Now, it anticipates adjusted earnings per share for fiscal 2024 to be between $6.10 and $6.20.
A high price tag
Walmart's goods may be known for their low prices, but you can't say the same about the grocery-chain's stock. Shares have risen 16% over the past year, giving the stock a premium valuation.
Trading at nearly 36 times earnings, Walmart shares don't look overvalued at this level. But they don't look undervalued, either. Even though Walmart's top-line growth during a tough environment shines the spotlight on the stock, growth is hardly fast enough to justify further multiple expansion in the stock's price-to-earnings ratio.
Sure, a durable business that's able to grow at reasonable rates consistently deserves to trade at a premium valuation. But further multiple expansion could mean the stock is getting ahead of itself, especially in light of the company's large debt load that it has used to leverage its returns.
Walmart's total debt is $49.5 billion and its cash and cash equivalents amount to $10.6 billion. Not only does this significant debt increase long-term risk to the retailer's business, but it also will likely cost the company more interest in the future with financing rates significantly higher than in past years.
While Walmart's strong results confirm that shareholders should keep holding, the stock's valuation may be too pricey for investors to buy in at this level.
