Two themes stood out to us in wide-moat Walmart's (WMT) fourth-quarter update. First, the company continues to see traction with consumers despite increased pressure from Amazon and other mass merchants, with U.S. comparable-store sales and e-commerce growth up 2.6%--including a 1.6% increase in traffic--and 23% respectively, which we think supports its intangible assets. Second, this growth is coming at the expense of margins, with gross margins falling 60 basis points to 24.1% due to the firm lowering prices to better compete and the extra variable costs associated with shipping and continued wages, technology, and efficiency investments on tap for 2018. In our view, this supports our more conservative longer-term outlook regarding profitability and likely explains today's pullback.
We plan to increase our $88 fair value estimate by a mid-single-digit percentage to reflect tax reform updates and time value of money, and see shares as fairly valued. We remain comfortable with our 10-year average annual revenue growth target of 2.6%, which balances ongoing price cuts with continued success in online grocery, including plans to double its click-and-collect locations this year to 2,000 stores, or 40% of the U.S. locations. However, we continue to take a more conservative outlook with respect to Walmart's longer-term profitability, which is validated by fiscal 2019 constant-currency operating margin guidance of 4.3% to 4.4% (comparing to our previous 4.5% estimate). We still see Walmart as being positioned for some margin expansion longer term through its scale inherent in its 4,700 U.S. stores--the basis for our low-cost moat source--but see operating margins approaching 5% over the next five years as more realistic than a return to historical averages around 6%, which we believe has been priced into market assumptions.
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John Brick, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.