Walmart’s Sales Still Strong Amid Pandemic

Our $116 fair value estimate for wide-moat Walmart WMT should rise by a low- to mid-single-digit percentage, reflecting the time value of money and solid third-quarter sales that outpaced our targets. While we continue to believe the firm should be able to capitalize on an increasingly omnichannel retail landscape in the near and long term (to the tune of a low- to mid-single-digit sales growth rate and 4% to 5% adjusted operating margins over the next decade), we still suggest investors seek a larger margin of safety as it continues to revamp its business model in a highly competitive environment.

Sales at Walmart U.S. and the international unit outpaced our third-quarter expectations, with 6.4% comparable growth, excluding fuel, and 5.0% constant-currency expansion, respectively; we had called for 4.5% and 3.8%. In-store sales outperformed our expectations as pandemic-related restrictions eased. Sam’s Club slightly underperformed, at 11.1% comparable growth, excluding fuel, versus our 12% prior mark, though we are encouraged that the unit’s membership income expanded at 10.4% -- a rate it hasn’t seen in the past five years. The sales growth led Walmart’s aggregate adjusted operating margin up a little more than 35 basis points, to 4.3%, above our 3.9% target, as costs leveraged.

We have a favorable view of Walmart’s continuing efforts to streamline its international portfolio, most recently in Japan, where it is selling most of its Seiyu supermarket chain (the deal values the divested unit at $1.6 billion). Although Walmart expects a $2 billion hit to earnings, we believe focusing resources on the firm’s core markets (North America, China, India) through this transaction as well as the announced sale of its Argentinian and British units earlier this fall should enable the retail giant to concentrate on developing a robust omnichannel platform in markets that will require considerable investment to stay ahead of aggressive, nimble competition.

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