Walmart: Soft End to Year Doesn't Alter Long-Term View

Wide-moat Walmart’s WMT fourth-quarter results fell short of our expectations, leading to $5.48 in full-year adjusted diluted EPS versus our $5.59 target, but our long-term view is intact, as we attribute the shortfall to transitory factors. An adjustment for the time value of money should largely offset the impact on our valuation, so we do not expect our $124 fair value estimate to change significantly. We assume a low-single-digit sales growth rate and 4%-5% adjusted operating margins over the next decade. Despite a mid-single-digit percentage decline in the shares on the news (more pronounced than our reaction, likely due to our greater focus on Walmart’s long-term prospects rather than the progression of the pandemic-era sales surge), we suggest investors await a more attractive entry point.

Sales slightly beat our expectations ($559 billion for fiscal 2021, around 0.7% above our target), driven by the U.S. and international units, which were affected by rising COVID-19 case counts. Profitability did not follow, with the domestic namesake unit posting a 5.2% fourth-quarter adjusted operating margin that lagged our target by just under 20 basis points as the pandemic boosted lower-margin grocery categories (the international segment’s 2.7% mark lagged our target by closer to 90 basis points but was affected by Walmart’s decision to repay property tax relief in the United Kingdom). Management’s fiscal 2022 guidance is consistent with our prior expectations, calling for slight declines in consolidated operating income and adjusted diluted EPS.

Sales in the domestic namesake unit (two thirds of fiscal 2021 sales) were balanced, with high-single-digit quarterly comparable growth in grocery, mid-single-digit expansion in the health and wellness categories, and low-double-digit expansion in general merchandise. Results should moderate as the economy normalizes after the pandemic, but recovering auto care and vision center sales should help soften the blow.

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