Walmart’s Value Proposition Shines as Search for Value Persists; Shares Fairly Valued

Walmart Stock at a Glance

• Current Morningstar Fair Value Estimate: $144
• Walmart Stock Star Rating: 3-stars
• Economic Moat Rating: Wide
• Moat Trend Rating: Stable

Walmart Earnings Update

We think wide-moat Walmart’s (WMT) fiscal 2023 fourth-quarter results showcased its reputation as a value leader. However, management’s weaker fiscal 2024 outlook reflects an uncertain economic backdrop and further margin degradation from unfavorable mix shift (towards grocery and the health & wellness categories, at the expense of general merchandise), albeit at a lesser degree relative to fiscal 2023. In this context, management’s guidance of 2.5%-3% sales growth and adjusted EPS of $5.90-$6.05 falls short of our 3.3% and $6.79 respective estimates. We plan to adjust our near-term estimates to be in line with the updated outlook, but our long-term forecast of low-single-digit sales growth and mid-single-digit adjusted operating margins remains intact. As such, our existing $144 fair value estimate should not change materially, leaving shares fairly valued.

Walmart closed its fiscal year with $611 billion in sales (6.7% growth) and adjusted EPS of $6.29, topping our $607 billion and $6.13 estimates, respectively. Healthy top-line growth was supported by strong comparable sales growth rates (excluding fuel) at both its namesake domestic division and Sam’s Club (up 6.9% and 14.7%, respectively), the latter of which realized an all-time high member count and incremental wallet share from mid- and high-income shoppers (both qualitatively referenced). Moreover, Walmart’s private-label penetration improved 160 basis points in the quarter as shoppers prioritize value. Against this backdrop, a product mix shift and markdowns (as an effort to bring down inventories) pressured Walmart’s full-year gross margin by 98 basis points to 23.5%. However, we expect fewer markdowns in 2023 as Walmart has largely addressed its inventory challenges. And despite near-term challenges, we think Walmart’s strong brands, value-oriented product lineups, and robust selling apparatus stemming from its scale (underpinning our wide-moat rating) should help the firm navigate a turbulent economy.