If you're unsure what to make of Walmart (WMT +2.19%), you're not alone. It's resilient, but certainly not immune to the effects of newly enacted tariffs. As CFO David Rainey recently noted: "The range of outcomes for Q1 operating income growth has widened due to less favorable category mix, higher casualty claims expense and the desire to maintain flexibility to invest in price as tariffs are implemented."
Translation? The retailer might be forced to spend a little more or accept narrower profit margins as a means of maintaining market share. The market sensed all this well before the statement was made, of course, which is why the stock is still well down from its February peak despite Wednesday's sizable surge.
Now, take an honest look at the bigger picture. Walmart is as strong as it's been since its heyday growth of the 1980s and 90s, and far better equipped to handle tariffs than the market's giving it credit for. That spells opportunity for investors.
More strategic sourcing than most people think
Walmart is the world's biggest brick-and-mortar retailer, with 10,771 locations. More than 5,200 of these are in the U.S., where more than 90% of the population lives within 10 miles of a store. It did $681 billion worth of business last fiscal year, up 5% from the previous year's top line.
WMT Revenue (TTM) data by YCharts.
Size isn't everything, though. In fact, it can be a liability simply because the bigger an organization gets, the more difficult it becomes to manage. Any tariff-related headaches, of course, only aggravate such unwieldiness.
However, Walmart isn't nearly as vulnerable to the latest round of tariff-prompted turbulence as it seems like it should be. Roughly two-thirds of what the company spends on inventory is spent on American-made products, for perspective. So, while Mexico and China supply a significant portion of the other one-third of its merchandise costs and many of its U.S. suppliers are certainly affected by tariffs, Walmart is far from being catastrophically undermined, despite much of the recent rhetoric.
The company's also been making moves that ultimately offer it a means of maintaining reasonably wide profit margins. Walmart now manages more than 20 private label brands of its own that each drive more than $1 billion in annual sales, five of which are each generating more than $5 billion worth of yearly revenue. These in-house goods essentially sidestep the wholesaling stage of the procurement process, making them cheaper to put on store shelves than nationally branded merchandise.
Walmart's resilience as an investment, however, is rooted in far more than a careful refinement of how and where it sources its inventory.
The bigger-picture, philosophical bullish thesis
You could argue that Walmart's sheer size provides it with an unfair advantage over its competitors. And you'd be right. Investors don't want a fair fight, though. They want the companies they own to dominate their respective markets. Not only does this help keep competition in check, greater scale also allows an enterprise to operate more cost-effectively.
While e-commerce giant Amazon is now roughly the same size as Walmart in terms of total revenue, it's a somewhat misleading comparison. Less than half of Amazon's annual revenue stems from sales of physical products. The slightly bigger portion actually comes from subscription and service revenue, like Amazon Prime or its cloud computing business.
There's no denying that Walmart simply enjoys a physical reach that no brick-and-mortar competitor can match. Costco Wholesale only operates 890 locales, while Target's store count is less than 2,000. Given the U.S. Census Bureau's estimate that 84% of the country's retail spending is still done in store, this dominant market presence leaves Walmart very well-positioned for whatever the future holds on this front.
Bolstering this bullish argument is the fact that well over half of Walmart's business is groceries. This matters simply because -- regardless of any economic hardship -- people are going to need to eat. Many are going to lean on Walmart as their best bet for getting the most bang for their grocery buck, since the giant retailer is also better positioned than any other to push back on suppliers when its wholesale costs start to swell. The company's been doing exactly that for the past month, in fact.
Not only is Walmart likely to hold up to any brewing economic headwind, it might even thrive because of one. As Rainey commented at a recent investor event: "We see opportunities to accelerate share gains while maintaining flexibility to invest in price as tariffs are applied to incoming goods."
There's also the distinct possibility that the tariff war may end before it races out of control.
NASDAQ: WMT
Key Data Points
Now's the time to buy
This bullish argument begs the question: Why is this stock down as much as it is since February's peak? The right answer is also the most obvious one. That is, most investors are jumping to broad, sweeping conclusions based on rhetoric without knowing all the relevant facts. Had they known most of the information laid out above, the crowd might not be nearly as quick to dump Walmart stock.
Someone else's mistake can mean opportunity for you, though. Walmart was already a compelling long-term prospect, but given the likelihood of 2025 results that will be far better than recently presumed, the stock's a strong buy sooner rather than later.
The analyst community thinks so, anyway. It's calling for sales growth of more than 4% this year and the year after that, which is impressive given its size and the industry's usually slow movement. Despite recent disruption, the vast majority of this crowd also still considers Walmart stock a strong buy, with a consensus price target of $109.08 that's more than 20% above the stock's present price. That's certainly not a bad way to start out a new trade.
