Walmart (WMT -0.01%) recently reported its fiscal 2024 first-quarter financials, and the results beat Wall Street expectations. Although diluted earnings per share (EPS) tumbled 16%, revenue jumped 7.6%, a sign that customers are seeking out value-focused retailers. Management was so pleased with the results that they raised the full-year guidance for both figures.
Should this dominant retail stock, which is up 26% over the past year, be in your portfolio? Or is it time to take the profits and sell? Let's take a closer look at Walmart.
Thriving in the face of inflation
During the company's most recent fiscal quarter (Q1 2024 ended April 30), U.S. same-store sales were up 7.4%, with e-commerce revenue increasing 27%. The e-commerce figure was boosted by the fact that advertising revenue soared 30% globally. Because Walmart's website is such a popular shopping destination, it makes sense that leadership is really trying to push more into ads.
"Globally, customers continue to seek value given the impact of inflation," CEO Doug McMillon highlighted on the Q1 2024 earnings call. It's known for its low prices, so it's not too much of a surprise that Walmart is posting above-average growth at a time of great economic uncertainty.
Groceries remain a strong product category for the business. "We continue to gain market share in the grocery category, including with higher income and younger shoppers," McMillon mentioned. Making sure that stores are properly stocked with enough merchandise is a top priority.
Thanks to productivity improvements, operating income rose 17%, as the business was better able to leverage its expenses. Looking ahead, Walmart's fiscal 2024 sales are projected to be up 3.5% year over year, with adjusted EPS of $6.15 (at the midpoint), which would equate to a year-over-year decline. Since Walmart currently has a debt balance of nearly $50 billion, higher rates are raising interest payments, hurting the bottom line.
What should investors do?
It's best to consider both the good and the bad before deciding what to do about a potential investment opportunity. In Walmart's case, investors certainly love its reliability and stability. This isn't some sexy, fast-growing, speculative growth tech stock. This is the largest retailer in the world, and a critical part of the lives of tens of millions of customers worldwide. Walmart isn't going anywhere, and it will still be a major retailer decades from now.
What's more, the business has produced consistent profits and free cash flow. This has helped boost shareholder returns in the form of dividends. In fact, Walmart is a Dividend King, which means that it has increased the dividend for 50 straight years. That's certainly attractive to some investors.
But there are important traits that might turn investors off. Walmart's trailing 12-month sales totaled a whopping $622 billion. Think about that for a second. That's higher than the gross domestic product (GDP) of countries like Sweden and Belgium. This means it's virtually impossible for Walmart to register outsized growth for many years going forward.
Walmart must also always worry about the ridiculously competitive environment. Most notably, e-commerce juggernaut Amazon is the most formidable opponent. People see real value in the Prime offering, and it will be difficult for Walmart to match Amazon's dominance in online shopping.
What also really dissuades me from wanting to own the stock is its expensive valuation. As of this writing, shares trade at a price-to-earnings ratio of 36. For comparison's sake, that valuation is higher than Walmart's trailing three-, five-, and 10-year average P/E multiples, a clear sign investors are probably viewing the stock as a safe haven in this type of economic environment. Walmart is also selling at a premium to its smaller rival, Target, which carries a P/E of 25 right now.
This tells me that the benefit of owning Walmart, during a period of higher inflation and when worries about a recession are on people's minds, may already be a thing of the past. I can't pay that high a multiple for a business that will likely grow in line with the GDP of the U.S. in the years ahead. In my opinion, there isn't any margin of safety investors can have by owning the stock.
If you've been a shareholder, maybe now is a good time to take some profits off the table. On the other hand, if you were considering buying the stock, simply add Walmart to your watch list for now.
