Walmart continues to aggressively target innovation in its operations to keep pace with Amazon, and its impressive fiscal second-quarter results led management to raise its full-year guidance for multiple metrics.
By Kris Rosemann
Global retail giant Walmart (WMT) is working hard to stay in front of consumers as online rival Amazon (AMZN) continues to disrupt traditional retail, “Amazon Powers Ahead; Continues to Disrupt Grocers,” and it appears to be doing a fine job. Total revenue at Walmart in its fiscal 2019 second quarter grew 3.8% from the year-ago period thanks in part to impressive comparable sales growth of 4.5% in the US, which was driven by 2%+ growth in both traffic and ticket. Net sales at Walmart International advanced 4% on a year-over-year basis, and comparable sales growth was positive in its four largest international markets. Comparable sales at Sam’s Club leapt 5% from the comparable period of fiscal 2018 as a 6.7% gain in traffic as partially offset by a 1.7% decline in average ticket.
Walmart US e-commerce sales jumped 40% in the fiscal second quarter on a year-over-year basis, and the company is on track to reach roughly 40% of the US population with grocery delivery by year end, a notable development as it takes on Amazon’s Whole Foods head on. Fresh food sales led Walmart US to its best grocery comps performance in nine years, but gross margin pressure in the quarter was present as a result of price investments, higher transportation expenses (fuel prices and third-party rates), and mix effects from growing its e-commerce business. Productivity improvements helped offset investments in e-commerce and technology on the operating line, but operating income in the quarter fell 3.7% from the year-ago period.
Bottom-line pressures were felt on Walmart’s cash flow statement as well as operating cash flow fell 2% in the first half of fiscal 2019 from the comparable period of fiscal 2018 to ~$11.1 billion, and free cash flow dropped less than 2% to $6.8 billion, which was still more than double cash dividends paid of less than $3.1 billion in the period. Walmart’s ability to continue paying a healthy dividend while investing robustly in its “convenience race” with Amazon is a huge positive for all factions of investors. We’d like to see a bit healthier of a balance sheet (net debt was nearly $38 billion at the end of the fiscal second quarter, including capital lease and financing obligations), but the company’s near-pristine credit ratings (Aa2 at Moody’s) speak to its financial health. Its Dividend Cushion ratio is a solid 2 at last check, and shares yield ~2.1% as of this writing.
Following its fiscal second quarter report, Walmart raised a number of guidance measures for fiscal 2019. It now expects consolidated net sales growth of ~2% (was 1.5%-2%), Walmart US comparable sales to be ~3% (was at least 2%), and adjusted earnings per share in a range of $4.90-$5.05 (was $4.75-$5.00). Consolidated adjusted operating income is now projected to be flat to down by a slight percentage (was low single-digit decrease). Walmart International net sales growth guidance has been pulled back to 0.7% from 3%, but the company still expects US e-commerce net sales to jump an impressive 40% in the year.
We currently value shares of Walmart at $94 each, meaning shares are changing hands in the upper half of our fair value range. We’re not particularly interested in adding exposure to the retail space at this juncture, even as we like the direction and apparent effectiveness of Walmart’s aggressive investments in next-generation shopping capabilities. Its international efforts in this area may very well bear substantial fruit as well, and we think its 77% stake in Indian e-commerce innovator Flipkart could prove to be a meaningful investment as the Indian middle class comes into its own as a meaningful consumer base for multinational corporations. Nevertheless, the price and convenience wars in retail may only be heating up, and Walmart will certainly have its hands full in working to ward off the competition.
—–
Valuentum members have access to our 16-page stock reports, Valuentum Buying Index ratings, Dividend Cushion ratios, fair value estimates and ranges, dividend reports and more. Not a member? Subscribe today. The first 14 days are free.
Kris Rosemann does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.