Walmart’s Strong Profits May Already Be Priced As Stocks Near All-Time High

Walmart’s Strong Profits May Already Be Priced As Stocks Near All-Time High
Walmart’s Strong Profits May Already Be Priced As Stocks Near All-Time High

Walmart’s earnings, amid falling discretionary spending, could fuel the rally that has propelled the company’s shares to record highs, or scare off investors looking to justify the retail giant’s lofty valuation.

As Walmart prepares to report its first quarter results on Thursday, Americans continue to spend heavily online, driven by demand for cheaper products. Known for its discounted merchandise, Walmart faces particularly tough online competition from Amazon and newcomers like PDD Group’s Temu in key categories such as personal care products, clothing and electronics.

Walmart’s stock is up 15% so far in 2024, more than the S&P 500’s 9% rise, increasing pressure on the company to deliver strong results.

Walmart shares have recently traded at around 25 times expected earnings, compared to a 10-year average valuation of around 20 times, suggesting investors are expecting strong earnings growth, according to LSEG data .

Wall Street expects Walmart to report nearly 6% growth in net income for its first quarter ending April 30, according to LSEG. Earnings per share are expected to come in at 52 cents, the high end of Walmart’s February guidance.

But these forecasts come as Walmart faces higher-than-average inventory. General merchandise, a crucial category for Walmart, generated $114 billion in sales, or a quarter of its total revenue, in the year that ended in January 2024.

Walmart has been replenishing its inventory at a slower pace than some of its competitors, according to LSEG data for the fiscal quarter ended Jan. 31. Both Kroger and Costco had better inventory turnover than Walmart, according to LSEG data for their most recent fiscal quarters. High inventory levels risk increasing Walmart’s costs and jeopardizing its profit margins.

In February, Walmart said its inventory was in “excellent condition” and that it felt good about its position going into its new fiscal year.

Americans’ spending intentions remain weak compared to 2021, at least when it comes to non-essential and discretionary products such as clothing, according to Deloitte, which has conducted surveys to measure demand.

B. Riley Wealth’s chief market strategist Art Hogan said he expected Walmart shares to trend higher if revenue and earnings beat estimates on Thursday.

“Walmart has more headwinds than headwinds and there is room for the stock to move forward,” Mr. Hogan said. He owns Walmart stock as an individual, but his company does not own shares.

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