Market Still Not Giving Wal-Mart Enough Credit

We do not expect to make a material change to our $75 fair value estimate for wide-moat

Our long-term thesis remains that Wal-Mart can leverage low-single-digit sales growth as investments moderate over the next 12-18 months, provided that the firm can indeed drive sales growth. Wal-Mart’s U.S. same-store sales once again increased (by 1.5%), with traffic up 1.7% during the third quarter. This increase represents the fourth consecutive quarter of positive traffic at Wal-Mart U.S.; if Wal-Mart generates 1% same-store sales growth in the United States during the fourth quarter, two-year stack comps will improve 50 basis points from the third quarter, indicating a positive trend in growth.

Wal-Mart’s U.S. comparable-store sales growth was driven by solid growth in many discretionary categories, and in grocery for the first time in several quarters. Given that e-commerce penetration in discretionary categories is high, we think that Wal-Mart’s solid growth in several categories (health and wellness, apparel, and home category comp sales all increased by midsingle digits) is worth bearing in mind. General merchandise sales declined by a low-single-digit rate, largely due to shifts in television adoption and shifts from post-paid to installment wireless plans; we expect these trends to continue.

Morningstar Premium Members gain exclusive access to our full Wal-Mart report, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.