Healthy third-quarter results for Walmart don’t necessarily mean the company is a smart investment.
One of the few stocks that showed some life despite the overall market slump of 17% this year is Walmart. Although investors have weighed the possibility of a recession and its impact on retail spending, shares of the retail giant are up 5% so far this year.
The company’s latest quarterly report has eased many investors’ concerns. Although Walmart still performs well, the company faces a few headwinds shortly. In this article, we will examine whether or not Walmart is currently a worthwhile investment.
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Analysts had not anticipated Walmart’s strong earnings in the third quarter. In constant currency terms, global sales grew by 9.8%, while actual sales increased by 8.2%. Although currency fluctuations decreased Walmart’s profit margins, international sales still increased by 7.1%.
Net sales are expected to rise by 5.5% overall, which caused the company to raise its guidance for the full year. Considering retail spending is slowing for most operators this year, Walmart achieving this goal would be a huge achievement.
Despite a slowdown in spending, Walmart’s position as a budget retailer keeps it competitive. Due to the current economic climate, this stock could be a worthwhile buy.
The economy is not currently in recession, at least not yet. If one follows the trends, Walmart has a reasonable chance of maintaining growth or at least the current level of performance. Walmart has maintained healthy profit margins and free cash flow growth during recessions like the Great Recession.
The company is likely to perform well in a down economy, despite past performance not guaranteeing future results.
Compared with Walmart’s recent earnings, Walmart’s projections for the fourth quarter and the year to come are less optimistic. A further squeeze on its consolidated operating income is expected because of currency fluctuations. The company’s gross profit margin has declined nearly 3% since last year, while its free cash flow has dropped 37%.
Currency losses and too much inventory contributed to this dip. Due to the pandemic’s shortage of supplies and the boom in shopping in 2020 and 2021, retailers invested heavily in inventory.
Consequently, there was a backlog of products to meet consumer demand. However, piles of inventory are still sitting on shelves because spending has slowed.
Markdowns are a consequence of products sitting on shelves, which reduces profits. During the third quarter, Walmart had $12.2 billion in inventory, a 12.6% increase over the previous year. As a result, Walmart’s inventory growth has slowed compared to previous quarters, indicating that it is addressing its inventory problem head-on.
However, high inventory levels coupled with a struggling economy could put the economy in trouble. In the long run, thin profit margins will result in less revenue and can strain the balance sheet.
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Target has a price-to-sales ratio of around 0.6, approximately the same as Walmart’s. Walmart is certainly doing better than its rivals, and it’s encouraging to know that its P/S ratio is well within normal limits. Although the company’s price-to-earnings ratio is 46, it indicates the company is trading at a premium, indicating it is trading at a premium.
As retail spending is expected to slow and Walmart has an inventory problem, investors may wish to hold off on buying Walmart. The company’s gross profit margins could fall even more in the next few quarters, creating a favourable buying opportunity. It is not guaranteed that this will happen.
If you’re looking for stability in a market that will cycle through its inevitable ups and downs, Walmart is still a reasonable buy. Dividends are paid at 1.5%, in line with the S&P 500, and the company has a fantastic payout track record to back it up. Over the last 20 years, the dividend has been raised yearly, and the dividend payout ratio has remained healthy at 68%. As a result, this company’s dividends won’t be cut anytime soon.