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Inflation and Supply Chain Problems Don't Deter Walmart

We suggest investors await a more attractive entry point.

Wide-moat Walmart WMT announced fourth-quarter results, and our $145 fair value estimate should rise by a low- to mid-single-digit percentage, mostly on account of the rescission of our prior expectation of a U.S. corporate tax rate increase. The firm remains on track to meet our long-term expectations for low-single-digit sales growth and mid-single-digit adjusted operating margins over the next decade, although we still suggest investors await a more attractive entry point.

For fiscal 2022, which ended Jan. 28, Walmart saw $572.8 billion in sales leading to $6.46 in adjusted diluted EPS. Our targets were slightly lower, at $571.8 billion and $6.43, respectively, with the company’s performance more resilient than we expected in the face of supply chain disruptions and wage pressure. The namesake domestic division saw 5.6% fourth-quarter comparable sales growth; we are encouraged that the firm continues to gain market share in traffic-driving categories, with grocery comparable growth in the high single digits and health and wellness rising in the midteens. Management expects mid-single-digit adjusted EPS growth in fiscal 2023; our forecast heading into earnings was in line after considering the change in our tax rate assumption.

We are encouraged by the growth in many of the firm’s alternative businesses, such as Walmart Connect (digital advertising), which increased revenue more than 130% year on year to more than $2 billion. While the sales figure pales relative to Walmart’s overall top line, the business is high-margin and helps the firm deepen its relationships with vendors and consumers. The company’s initiatives in healthcare, personal finance (bolstered by its pending acquisitions of Even Responsible Finance and One Finance), and advertising should provide long-term margin benefits as they scale domestically and abroad, helping to offset persistent competitive long-term price pressure in the retail business.

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