Stepping into a new stake in Walmart (WMT +0.53%) right now might be a bit uncomfortable. Shares are up nearly 30% since October's low, and higher to the tune of 65% from their mid-2022 bottom (and well into record-high territory as a result). The stock is also priced at 26 times its projected per-share earnings. Tacking on more gains from here could prove challenging.
But this may be one of those cases where it makes sense to pay a premium price for a stock in anticipation of more straightaway forward progress. Four reasons for owning Walmart shares stand out among the rest.
1. It's still growing
Too many companies are hitting a proverbial wall at this time thanks to the tough economic environment. Rival retailer Target (TGT 0.54%), for instance, saw its same-store sales sink 3.7% for the quarter ending in early May.
Not Walmart, though. Its same-store sales in the United States grew 3.8% during its first fiscal quarter of this year, helping drive overall revenue growth of 6%. These numbers also extend well-established trends, which have driven even stronger profit growth.
How is Walmart able to do what such a similar competitor can't? A great deal of it can be attributed to the slightest of differences between the two companies' inventory assortments. Target sells more discretionary goods, and clothing in particular. Walmart sells more groceries, and offers more consumer staples that remain in demand even when money is tight.
Walmart's value and low-pricing paradigm are always marketable, of course. It's Target's business that can run hot and cold depending on the condition of the economy and the subsequent health of consumer spending. Between persistent inflation and no real interest rate relief on the horizon, though, Walmart's current sales growth could be sustained indefinitely.
2. Walmart is also winning affluent customers
A good deal of this growth is coming from a demographic the retailer hasn't done overwhelmingly well with in the past. That's households earning in excess of $100,000 per year. Management has been regularly touting its progress with this crowd since 2022, when rampant inflation began forcing even higher-income earners to stretch their dollars as much as possible.
It remains to be seen whether these people will continue shopping with Walmart once the current economic hardship abates. Indeed, not everyone is confident they will, including former Walmart U.S. CEO Bill Simon. He argues that Walmart's lower prices and greater convenience will mean a little less then.
The company isn't unaware of its vulnerabilities on this front, however, and is shoring up these gaps when and where it can. Take the new look shoppers are increasingly seeing at its stores as an example. Walmart is using more mannequins to display its higher-end clothing, for instance, giving people something they're accustomed to seeing at a mall-based department store.
The retailer is also promoting its subscription-based Walmart+ program, offering affluent households something similar to what they enjoy with their subscriptions to Amazon Prime.
3. The retailer's e-commerce business remains a growth engine
While e-commerce is anything but a new venture for Walmart, it's still generating incredible growth for the company. Last quarter's online sales improved 21% year over year, extending a long-standing streak of comparable progress.
Although the retailer doesn't regularly disclose too many other specifics about this business, third-party analysts indicate that its e-commerce arm generates on the order of $80 billion in sales per year. That's roughly 13% of the company's total top line, and on the order of 14% of Amazon's yearly sales.
Translation: Although Amazon is a tough competitor, there's room for Walmart to continue penetrating this ever-growing market.
NASDAQ: WMT
Key Data Points
And there's every reason to believe that's exactly what's going to happen. See, the retailer is still tweaking its online shopping platform. The most recent game-changing evolution is the introduction of advertisements allowing Walmart.com's third-party sellers to promote their merchandise.
This isn't a particularly big business -- at least, not yet. It's a high-margin business, however, which CFO John Rainey says sports profit margins in the ballpark of 70% to 80%. This advertising revenue grew another 24% during the first fiscal quarter ending in April.
4. Its scale actually helps
Last but not least, buy Walmart stock just because the company is big -- much bigger than any of its brick-and-mortar retail rivals.
There was an era when greater size was advantageous simply because it allowed an organization to apply leverage, optimize spending, and keep smaller competitors from expanding their reach. Then these smaller outfits figured out how being nimble could be used to their advantage. The use of technology -- often a great equalizer -- helped lesser companies find their competitive edge as well.
Meanwhile, the complexity often linked to corporate growth is proving more problematic than beneficial for a handful of larger outfits. Walmart's control of its size-based advantages, however, is simply overwhelming to any and all rivals. As an example, it's so big that it's often the most important account for many of the companies that supply it with inventory. This in turn means tremendous volume-based price breaks.
Walmart also enjoys enormous geographical advantages with stores, warehouses, and logistics infrastructure. For instance, the size and location of its fulfillment centers means about three-fourths of the U.S.'s residents can get one-day and two-day shipping on millions of its items sold at Walmart.com. In the meantime, roughly 90% of Americans live within 10 miles of a Walmart store.
Connect the dots. It's a go-to option for many shoppers simply because it's fast, and/or convenient. The company doesn't really have to do anything other than open its doors to win a big chunk of its business.
Just buy Walmart stock and forget it already
None of these nuances are guaranteed to prevent Walmart stock from peeling back, of course, now or in the distant future. Stocks ebb and flow, often for no clear reason. Walmart shares will certainly slide at some point again. Maybe that will happen soon.
Without knowing when such a short-term setback is due, though, trying to time any entry into this name could prove more costly than beneficial. The long-term bullish case is strong right now regardless of the stock's recent short-term action. Hot stocks can easily remain hot, or get hotter. So, just hold your nose and dive in already.
