Walmart Earnings Preview: America’s Inflation Fighter and AI Beneficiary

2024.05.14 16:35

Walmart (NYSE:) is expected to report their fiscal Q1 ’25 financial results before the opening bell on Thursday, May 16th, 2024. Analyst consensus is (after the three-for-one split last quarter) is expecting $0.52 in earnings per share, $6.5 billion in operating income and $159.5 billion in quarterly revenue for expected yoy growth of 6%, 4.5% and 4.4% respectively.

Last quarter, Walmart’s holiday quarter ended January 31 ’24, saw EPS +5%, operating income +13% and revenue +5.5%.

The real story (in my opinion) at least over the next few quarters is grocery deflation and Walmart’s ability to lower grocery prices for their customers. During last quarter’s conference call, Walmart management said that grocery prices would continue to “deflate” (remember, this doesn’t mean “disinflate” or lower prices but still positive yoy), but deflation, which means a gradual decline in prices on a year-over-year basis.

Here’s the data proof for readers: let’s look at comp’s and “average ticket” for Walmart since the pandemic started:

Note how “average ticket” has turned negative for the last 2 quarters: Walmart has seen grocery comp at MSD last quarter even though general merchandise declined (in terms of comp’s).

Not knowing the detail of CPI weightings off the top of my head, you’d have to think that grocery and household would be an important part of consumer inflation, so let’s see what the CPI holds tomorrow morning, May 15th, 2024, in terms of grocery or household food items inflation or deflation.

Per the street consensus numbers, Walmart is expected to print $700 billion in revenue in fiscal 2026, which ends in January ’26, and anywhere between 52% and 70% (depending on which analyst you read) of that $700 billion will be grocery revenue.

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If written this before for readers, but Joe Nocera wrote way back in the early 1990’s when he wrote Column 1 for the Saturday New York Times, that Walmart could be one major reason that inflation was remaining contained during that early 90’s period, when Alan Greenspan was the Fed Chair. As someone who was a baby analyst at that time, on the fixed income side of the business, and living through the banking and commercial real estate crisis that dominated the US economy after the first Gulf War in 1991, there was more going on in the US economy, but Walmart undoubtedly helped. Walmart’s grocery business really didn’t begin until 2000, and already Walmart is far-and-away the biggest grocer in America, if not the world.

Amazon (NASDAQ:) is trying get into the grocery business, and I’ve shopped at Amazon Fresh and will continue to do so, (and I’m also a Walmart ecommerce client and am a member of their Walmart Home delivery service, and will continue to be so) but Amazon fresh and their physical stores remain well behind Walmart grocery and probably will continue to do so. It’s just an opinion, but that’s going to be a tough hill to climb for Amazon Fresh, not to mention Kroger (NYSE:) (one of the reasons I think Kroger want after Albertsons (NYSE:) was to try and gain market share vis-a-vis Walmart).

Walmart: The next 5 – 10 years

McKinsey apparently put out a report on AI beneficiaries and it appears – from a Jefferies research report – put out by the Jefferies discount retail equity research team that Walmart is expected to be one of the bigger retail beneficiaries of AI.

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The three big sector winners per the McKinsey study are expected to be 1.) retail, 2). transport and logistics, and 3). travel.

Personally I think Jefferies does great work. Brent Thill is a regular on CNBC and has done great work with the mega-cap tech space and now the AI space.

Walmart is a secular 3% – 5% revenue grower and a secular 7% EPS grower, given the expected $700 billion in revenue projected for 2026. The point being to that – and I haven’t read either the McKinsey or the Jefferies report in detail – if Walmart wants to use AI effectively it’s likely going to be from cost reduction or what’s called “the middle of the P/L” and productivity gains.

Jefferies published some potential advertising revenue estimates, with the analyst putting a $3.5 billion ad revenue expectation for fiscal ’25, however in the light of the expected ’26 total revenue estimate of $700 billion for Walmart, that’s still a small percentage of WMT’s total revenue and may not be material for a few years.

My guess is that AI will not reinvent the wheel for a retail juggernaut like Walmart from a revenue perspective. Sam Walton’s basic business model – every day low price (EDLP) – and covering 75% of the US population is the sustainable competitive advantage for Walmart, thus AI will likely supplement what currently exists, and it could have a material effect on Walmart’s labor and supplier costs.

The key metric to watch going forward – in my opinion – is Walmart’s operating margin. That’s the financial metric that in my opinion will start to reflect Walmart’s supply-chain, and inventory management initiatives.

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Summary:

Although Amazon is closing the gap, and I haven’t seen a table ranking the SP 500 components by revenue, you’d have to think with Walmart expected to generate $673 billion in revenue in fiscal ’25 (ends January ’25) and then $700 billion in fiscal ’26 (ends January ’26), that the retail giant is one of the top 3 SP 500 components when ranked by revenue (Exxon Mobil (NYSE:) perhaps being very close).

The operating and perhaps gross margin(s), will tell the story for Walmart as they move into the AI era, and whether a retail giant like Walmart can become an AI beneficiary.

The stock continues to be valued like the consumer staple that it is, and it’s performance over the last 23 years has been less than stellar, although Walmart’s recent stock price performance has improved. Although Walmart is still lagging the , it has caught up and has performed much better than some of the more visible stocks in the consumer staples category.

We have modeled Walmart since the mid 1990’s. Here’s a quick look at Walmart’s EPS growth by decade:

• 2020 – 2024: EPS gro avg’d 6% per year
• 2010 – 2019: EPS gro avg’d 4% per year
• 2000 – 2009: EPS gro avg’d 13% pear
• 1990 – 1999: EPS gro avg’d 17% per year

It was clear after 2010 as America emerged from the 2008 recession that Walmart was losing ground to Amazon in general merchandise categories, particularly apparel. Grocery is the holy grail of retail, it’s lower-cost, lower-margin items with high inventory turnover, but grocery drives foot traffic. Foot traffic is a good thing for a retailer like Walmart.

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Walmart’s stock broke out to a new all-time-high as Amazon still struggles with it’s all-time-high print of July ’21. Walmart lost significant ground to Amazon from 2010 to later that decade, but has made a concerted effort to push back. A recent book published by Jason Del Ray entitled, “Winner Sells All” (which reads more like a case study) does a good job of detailing the battle between Amazon and Walmart and my take was Walmart was gradually perfecting the ecommerce and home delivery services, while Amazon was having a much tougher time perfecting “physical stores” or brick-and-mortar.

Walmart is now a 1.5% position in client accounts, up from 0% and the catalyst to own was the selloff in Walmart down to $120 (pre-split) as the stock was crushed on bloated inventory growth exceeding revenue growth in late ’21 and early ’22.

WMT sells at a big discount to par or price-to-sales / revenue. WMT is currently trading at 0.75x price-to-sales. Retailers are thought to be fully-valued at 1x price-to-revenue, which would leave another 25% upside for Walmart just to get to par. That’s not a promise or a prediction, but margin expansion could help Walmart close that valuation gap, which the stock has traded at for years.

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None of this is advice or a recommendation. Past performance is no guarantee of future results. Investing can involve the loss of principal even for short periods of time. All consensus EPS, revenue and operating income estimate data is sourced from LSEG.com.

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