Lackluster End to 2020, Tepid Guidance for Walmart

Our fair value estimate for wide-moat Walmart WMT should remain near its current $105 per share, with soft year-end results and fiscal 2021 guidance offset by the time value of money. We still believe that Walmart will transition to an omnichannel powerhouse, with our 10-year forecast calling for low-single-digit annual percentage top-line growth and 4% adjusted operating margins, on average. We suggest prospective investors await a more attractive entry point.

At 1.9% and 0.8%, Walmart U.S. and Sam’s Club lagged our 2.8% and 2.0% respective quarterly comparable growth targets, and the international unit’s 2.3% net sales growth also trailed our 3.2% forecast. Diluted GAAP EPS of $5.19 for fiscal 2020 met our target, though the $4.93 adjusted mark fell short of our $5.02, partly due to unrealized investment gains. Management set fiscal 2021 adjusted diluted EPS guidance at $5.00 to $5.15. While forecast share repurchases account for part of the difference between the range and our prior $5.25 mark, we anticipate curbing our operational expectations as a result of the year-end sales softness, lingering effects of unrest in Chile, and the prospect of coronavirus-related slowdowns in China (the latter of which is not incorporated in guidance).

While slow apparel sales (attributed to a surplus of seasonal and low-price attire) contributed to the U.S. shortfall, we are encouraged management is focusing on boosting general merchandise sales, particularly online. With grocery operating margins tight (estimated in the low single digits versus Walmart U.S.’ mid-single-digit marks) and pressured by relentless competition, Walmart’s ability to use food to spur more lucrative general merchandise turnover will be critical to e-commerce profitability and protecting returns. Despite relentless price pressure, we expect adjusted operating margin of about 4.5% in 10 years (from 4.1% in fiscal 2020) as digital profits emerge and costs scale.

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