Strong U.S. Marks Propel Walmart’s Second Quarter

We expect to raise our $111 per share valuation for wide-moat Walmart WMT by a mid-single-digit percentage after it posted strong second-quarter top-line growth in its U.S. businesses, reflecting continued heightened shopper activity in response to the pandemic and economic stimulus programs. Despite the uptick, our long-term forecast still calls for low-single-digit annual percentage sales growth and 4% adjusted operating margins, on average. We suggest investors await a more attractive entry point.

The U.S. namesake banner and Sam’s Club both saw 9% comparable growth (including fuel), handily outpacing our mid-single-digit prior forecasts, led by stronger-than-expected general merchandise sales. As customers redirected spending previously ticketed for travel, restaurants, and other activities to enhancing their at-home work and leisure options and adding to their grocery orders, Walmart U.S. saw mid-teens comparable expansion in its general merchandise lineup and mid-single-digit upticks in its food and consumables categories. The grocery mark appeared sluggish relative to pure-play rivals (for example, Albertsons saw 27% identical sales growth in its quarter ending June 20). However, we attribute the differential to Walmart’s stronger omnichannel position heading into the crisis, normalizing July sales, tighter inventory levels (that contributed to more pronounced stocking issues early in the pandemic), and reduced store hours (that have recently begun to reverse).

The namesake stores’ e-commerce performance outpaced our 65% second-quarter growth target, with sales up 97% in the period. The digital sales are still margin-dilutive, but we are encouraged by management’s indications that economics have improved as penetration builds. The growth comes before the launch of the Walmart+ membership program, which we believe will allow the firm to compete more directly with wide-moat Amazon (and its Prime offering) for digital sales while leveraging its store network.

Morningstar Premium Members gain exclusive access to our full analyst reports, 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.