EUR 850.00 For Business Accounts Only

Morningstar | Unsurprising Start to Fiscal 2020 Leaves Our Outlook Intact for Walmart; Shares Slightly Rich. See Updated Analyst Note from 16 May 2019

Our $94 per share valuation for wide-moat Walmart stands after it announced unsurprising first-quarter earnings. Solid U.S. performance and e-commerce gains are consistent with our view that Walmart’s competitive advantages should allow it to successfully navigate a turbulent retail landscape. We still expect low single-digit top-line growth against 4% adjusted operating margins over the next decade, on average.

Walmart saw 1% total revenue growth against a 4.0% adjusted operating margin in the quarter. We expect it to deliver just under 3% top-line expansion and a 4.1% adjusted operating margin for the year. Management last offered full-year guidance at the end of the fourth quarter, and our $4.79 adjusted diluted EPS mark, down 2% from fiscal 2019, is in line with leadership’s calls for a low-single-digit percentage dip.

We believe Walmart is well positioned to capitalize on the digitizing retail landscape. While the ship to home channel draws the most attention, we expect the future of retail is omnichannel, with consumers expecting a menu of fulfillment options (home delivery, click-and-collect, and traditional in-store purchases) and making different choices dependent on preference, the immediacy of the need, and the nature of the item. Walmart should be able to use its procurement and distribution scale, store network, and digital investments to protect returns. Its move to complementary next-day shipping, as well as expansion of grocery pickup and same-day delivery (now at 2,450 and 1,000 U.S. stores, respectively), should leave it in good stead.

Domestic performance drove results, with the namesake U.S. stores posting a strong 3.4% comparable sales gain and Sam’s Club showing a similar 3.0% mark excluding fuel and tobacco. We expect both chains to show low single-digit long-term top-line growth, propelled by e-commerce. Still, the need to hold prices down and invest in costlier fulfillment options should limit the margin benefits of cost leverage.

While we continue to believe Walmart’s competitive position is holding steady (leading to a stable moat trend rating), we are lifting our uncertainty rating to medium from low. The change reflects an unyielding competitive environment that we expect to persist, complicated by the lack of switching costs in retail and unsettled customer habits as the sector’s digitization unfolds. Although we believe Walmart is uniquely positioned to meet Amazon on equal terms, the sector’s turmoil creates risk to the firm’s top and bottom line.