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Morningstar | Walmart's Strong Quarter Indicates Ongoing Strength Despite Competitive Onslaught

We plan a mid- to high-single-digit percentage uptick in our $90 fair value estimate for wide-moat Walmart after strong second-quarter results. With U.S. and e-commerce results particularly strong, we believe the performance validates our view that Walmart will protect its return-generating ability even amid intense competition. As such, our long-term forecast is intact for low- to mid-single-digit organic revenue growth and 4% adjusted operating margins, on average, over the next decade.

First-half sales rose 4% against a 4.3% operating margin. Management revised its adjusted earnings per share guidance to $4.90-$5.05 from $4.75-$5.00, against our $4.61 target (unlike guidance, our analysis includes Flipkart, which management expects to generate $0.25-$0.30 of fiscal 2019 dilution).

U.S. results were especially strong, with 4.5% quarterly comparable sales growth (excluding fuel), the unit's strongest mark in over a decade; the segment accounted for 64% of fiscal 2018 sales. Traffic and ticket contributed fairly equally, with results buoyed by grocery sales as Walmart's updated bakery, meat, and produce sections delivered results. Walmart noted that it achieved 40% e-commerce growth for the quarter and expects a similar mark for the full year, with the firm using an expanded brand assortment and school supply lists integrated into its mobile apps to drive usage; digital sales contributed about 100 basis points to U.S. comparable sales results. We still expect Walmart to post roughly 20% annual growth in its digital efforts (outside of Flipkart) over the next decade, using its proximity to customers, brand, and distribution strength to provide a compelling omnichannel offering. The firm's considerable competitive advantages, borne of its brand and cost standing, should continue to translate well into digital retail as Walmart uses its buying power to enable its characteristically low prices, particularly among customers who are not Amazon Prime members.

Internationally (24% of fiscal 2018 sales), Walmart saw similar success, with its four largest markets posting comparable sales gains. Delivery and click-and-collect expansion was a part of the story worldwide, with the firm offering such services in grocery across about 40% of its Mexican stores and providing one-hour grocery delivery from 200 stores in China. We expect Walmart's efforts to succeed even as Amazon's penetration builds, with the international unit (excluding Flipkart) generating mid-single-digit organic growth over our explicit forecast.