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Lower Profitability a New Normal for Walmart

John Brick, CFA

John Brick: Walmart reported fourth-quarter earnings this morning which showed a continuation of its strong top-line growth. E-commerce sales were up 23%. U.S. same-store sales were up 2.6%, really showing the firm's ability to drive traffic. 

The shares were down almost 10% in the early hours as people were diagnosing the strong competition in the space; their higher costs associated with shipping and e-commerce front; and third, the firm's investment in technology and in-store initiatives. All of this together really has dampened the firm's profitability and have constrained it longer term, and we think it's more of a new normal, a lower profitability for Walmart. 

Shares are trading at about $95. We believe investors should wait for a higher margin of safety, as our fair value is $88.