Walmart Shows Strength in Q3 as Costs Rise

Wide-moat Walmart WMT saw strong fiscal 2022 third-quarter results (4% revenue growth versus our sub-2% expectation) as customers looked to the chain for value amid rising prices throughout the economy. We believe the updraft is temporary, leading us to maintain our long-term targets of low-single-digit sales growth and mid-single-digit adjusted operating margins over the next decade. However, our near-term estimates should rise. As a consequence, and to reflect the time value of money, we expect to lift our $136 fair value estimate by a mid-single-digit percentage. We still suggest investors await a more attractive entry point. The strong performance was led by the domestic divisions. The namesake unit saw 9% comparable sales growth (16% on a two-year stack basis) that beat our 7% target, while Sam's Club posted 14% expansion (excluding fuel) that outpaced our 9% mark. The company's adjusted operating margin dipped to 4.1% (we had expected 4.3%, in line with the prior-year mark), attributable to supply chain costs and rising fuel sales. Management now expects fiscal 2022 adjusted EPS of around $6.40 (previously $6.20-$6.35), and our prior $6.32 estimate should rise toward the new guidance. We are encouraged by management's indications that Walmart's inventory and staffing positions are sound. Although costs rose, we believe the chain is poised to capture continued store traffic growth as shoppers look for value. Walmart's purchasing power and cost leverage are unparalleled, in our view, and so the company should be in a better position to secure products economically than smaller rivals. The inflationary environment provides some cover for the retail juggernaut to boost prices as well, particularly as customers look to the gaps between Walmart's pricing and that of its rivals. Given this and a growing e-commerce presence (up 8% in the United States or 87% on a two-year stacked basis), we believe Walmart is well positioned to withstand a turbulent retail environment.

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