Analyst Note| Zain Akbari |
We plan to raise our $139 fair value estimate for wide-moat Walmart by a mid-single-digit percentage (like the trading price reaction) after the firm announced strong third-quarter results that benefited from consumers’ heightened focus on its value proposition. We still expect low-single-digit annual top-line growth and mid-single-digit operating margins over the long term. With the shares trading near our valuation, we suggest investors await a greater margin of safety.
Revenue rose 8.7%, with all divisions contributing to the strong result (8.2% adjusted comparable sales increase at Walmart U.S. and a 10.0% rise at Sam’s Club; 7.1% net sales growth at Walmart International). Management said consumers across the income spectrum are looking to Walmart for savings in light of high prices throughout the economy, with most of the company’s market share gains in the quarter coming from higher-income consumers. As was the case in the first and second quarters, product mix was a headwind as consumers refocused on everyday essentials, but the company benefited from higher sales in its more lucrative private-label assortment. We believe all these developments suggest Walmart’s value-oriented competitive positioning is intact despite an unsettled retail landscape.
Although its fourth-quarter outlook is largely the same, management updated its full-year guidance to reflect the third-quarter outperformance, calling for a 6%-7% adjusted EPS decline (previously 9%-11%). Our roughly 10% estimated decline, excluding forecast share repurchases, should rise to a level somewhat above 6%, as we believe the fourth quarter could be better than expected, considering that Walmart has addressed many of the inventory challenges that led to above-normal discounting earlier in the year. We also suspect Walmart’s omnichannel capabilities (Walmart U.S. e-commerce up 16%) will draw more shoppers looking for value and convenience, as it has invested to improve its standard of service.