Mixed First-Quarter Results at Walmart, Shares Rich

After it posted mixed first-quarter results, we do not plan a large change to our $108 fair value estimate for wide-moat Walmart WMT, with our long-term targets (low-single-digit annual percentage sales growth, 4% adjusted operating margins, on average) in place despite pandemic-related volatility. We suggest investors await a more attractive entry point.

The U.S. namesake banner’s 10% comparable growth lagged our 12% mark, including fuel, though e-commerce growth of 74% beat our 60% forecast. Although stimulus payments led to a late-quarter recovery, higher-margin discretionary categories were more sluggish than we expected and contributed to an 89-basis-point segment operating margin slump (we assumed only a small pullback). However, Sam’s Club outperformed (a result of greater-than-expected new membership sign-ups, we suspect), with 9% comparable growth, including fuel, ahead of our 8% mark and profitability up 10 basis points rather than our 50-basis-point expected decline. The international unit was broadly in line with our expectations for 8% constant-currency growth and a 10-basis-point operating margin pullback.

We suspect the sales uplift and profitability headwind from e-commerce will remain as customers continue to adapt to social distancing recommendations. We do not see the discontinuation of the jet.com brand as a meaningful factor, as recent growth in all aspects of Walmart’s namesake e-commerce presence augured well for combining operations. We are similarly encouraged that Walmart is adding more general merchandise categories to its pickup platform, which should add cost leverage while providing a margin uplift from adding more lucrative categories to what had been a grocery-focused operation. Still, we anticipate the shift to higher-cost digital fulfillment options will accelerate as a result of the pandemic, leaving long-term operating margins near fiscal 2020’s 4% mark despite scale-based cost leverage and improving international economics.

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