Walmart (WMT 1.25%) has impressed investors this year as the company doesn't appear to have the problems other retailers do. It's not blaming bad results on "shrink" (or retail theft), for example, and its business is still delivering some solid growth. Year to date, the stock has risen 16% while rival Target has gone in the opposite direction, nosediving by 17%.
But while Walmart is doing well, it's not performing all that great in the U.S. domestic market, where its growth rate has been slowing down. And this is something that investors should watch out for because if the retail giant is relying on its international operations for growth, the stock could become vulnerable.
The bulk of operating income is generated in the U.S.
In Walmart's most recent quarter, ended July 31, operating income rose nearly 7% year over year to $7.3 billion. That's a healthy growth rate at a time when retailers are struggling with rising costs. But what's notable is that the vast majority of those profits comes from the U.S. segment. Walmart U.S. reported operating income of $6.1 billion versus less than $1.2 billion from Walmart International. The margins that Walmart generates are also slightly higher in the U.S. market.
Data source: Company filings. Chart by author.
International sales growth may not last
Last quarter's sales growth was an odd one when you look at just how strong the international business was compared to Walmart's other segments.
Data source: Company filings. Chart by author.
By comparison, in fiscal 2023, which ended on Jan. 31, Walmart International reported no year-over-year sales growth. And in the company's second-quarter earnings report, it says the strong growth was led by multiple markets, including China, which loosened COVID-19 restrictions at the start of the year.
My concern is that Walmart's strong growth in international markets may not be sustainable. While it did well last quarter, it definitely benefited from going up against weak comparables from the previous year, particularly in China. Investors should be careful not to assume that will be the norm moving forward.
Sales growth from Walmart International is a positive, but it's the more profitable domestic market that needs to be strong. Otherwise, the stock could come under pressure.
Walmart's stock is expensive
If Walmart's growth rate slows down, then that can be a problem for the stock as its valuation is higher than usual. Historically, this stock trades at around 25 times its earnings. While there have been fluctuations, the stock is clearly trading at an elevated level; it could be only a matter of time before it retreats back toward the mean.
WMT PE Ratio data by YCharts
The average stock on the S&P 500 trades at only 23 times its earnings. Target is at a multiple of only 17. Walmart is trading at a premium and while a slightly higher price may be justifiable, at more than 31 times profits, it's an expensive-looking stock to be owning right now.
Walmart's stock could be due for a drop
Given that geopolitical issues likely weighed down certain international markets a year ago, Walmart's growth rate may not be sustainable. And at a potentially lower growth rate in the near future, it becomes harder to justify the stock's inflated valuation; a decline could be overdue.
Walmart's business is strong and versatile but that doesn't mean investors should ignore valuation. Investors are better off looking at other, more reasonably valued retail stocks to buy than Walmart right now.
