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Walmart benefits from a winning combination of keen prices, a dense store network and a growing digital business
Thursday 11 Feb 2021 Author: James Crux

A  share price pause for breath at the world’s biggest retailer Walmart presents a buying opportunity ahead of fourth quarter results on 18 February. These should confirm another period of firm market share gains and online sales progress and contain an exciting update on Walmart’s strategic priorities.

A $412 billion cap retail goliath, Walmart has been gobbling up market share during the pandemic and we believe these gains should stick once the Covid crisis abates.

Moreover, we think it is well worth investing in one of the few global retailers with the financial clout and online capabilities to compete with Amazon long term at least in its domestic market.

Near term, this progressive, high-quality dividend payer has ‘Every Day Low Price’ at the cornerstone of its strategy, leaving it well placed to benefit as hard-pressed US consumers spend their stimulus cheques online and in its stores.

WALMART’S WIDE MOAT

A consumer defensive colossus, Bentonville-based Walmart operates variety stores, discount stores, superstores, Sam’s Clubs (its membership-only retail warehouse stores named after founder Sam Walton) and Neighborhood Markets, along with the walmart.com and samsclub.com websites.

Walmart sells everything the consumer could want, ranging from groceries and electronics to clothing, home furnishings and health and wellness products.

As of 23 Sept 2020 the company, led by chief executive Doug McMillon, operated around 11,500 stores across 27 countries including the US, Canada, Central America, Chile, China, India, Mexico and Africa.

Besides being a traditional bricks and mortar retailer, Walmart has transformed itself into a leading omnichannel player through acquisitions including Jet.com, acquired in 2016 to bolster its online ambitions, and the likes of men’s clothing site Bonobos and online active outdoor retailer Moosejaw as well as delivery company Parcel.

Walmart has also forged partnerships with the likes of Shopify and JD.com, invested heavily in delivery initiatives like Walmart+ and backed Indian e-commerce platform Flipkart. This dizzying array of deals has positioned the company to keep pace with the fast-moving retail ecosystem and compete with Amazon.

Morningstar believes Walmart has a wide economic moat and is in fact ‘the only American retailer that can compete comprehensively with Amazon’s retail offering’, given its ‘unrivalled scale’, ‘prodigious procurement strength’, strong brand and growing e-commerce platform.

In order to sharpen its focus on core growth regions, Walmart has sold its majority stake in UK grocer Asda, offloaded its retail operations in Argentina and announced a deal to dispose of a major stake in Japanese subsidiary Seiyu.

CLEAR COVID WINNER

With non-essential retailers and mom and pop shops unable to open during the Covid-19 pandemic, Walmart has mopped up market share, benefiting from bumper demand for essential items.

In addition, the stay-at-home trend has turbo-charged its e-commerce sales. These tailwinds enabled Walmart to smash sales and earnings estimates for the third quarter of its financial year to 31 January 2021.

Third quarter results showed a $6.7 billion jump in total sales to $134.7 billion and marked Walmart’s 25th consecutive quarter of like-for-like sales growth, with comparable sales skipping 6.4% higher thanks to strength in general merchandise, food, and health and wellness sales.

US e-commerce sales surged 79% higher with a boost from pandemic-led social distancing, though it should be noted all this extra business comes with higher Covid-19-related costs, such as higher wages and benefits and sanitisation and other safety measures. Online strategies are driving the growth, but they also require hefty investment in e-commerce expansion and technological advancements.

Nevertheless, given that the pandemic has permanently changed grocery shopping, we believe best-in-class operator Walmart will be able to keep these customers even after the coronavirus crisis ends, and that is why it is well worth paying up for the shares.

According to Refinitiv data, Walmart trades on a price-to-earnings ratio of 25.3 for fiscal 2022, a premium to the likes of Tesco (TSCO) on 13.4 times forward earnings or France’s Carrefour (CARR:PA) on a prospective multiple of 9.6. But one which is justified by a more diversified and digital strategy.

For the year to January 2021, Refinitiv-compiled forecasts
point to pre-tax profits of $21.86 billion, rising to $21.95 billion in 2022 and then $23.07 billion in 2023.

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