Lex: Walmart’s cheap goods justify its expensive stock

A Walmart in Miami, Florida. The US retail giant reported robust third-quarter results this week. Photo / Getty Images via AFP

Opinion

Lex is the flagship investment column of the Financial Times and has been published since 1945.

OPINION

It is a rare retailer whose shares trade at a premium to those of Apple, Microsoft, and Alphabet. But there are merchants, and then there is Walmart.

Operationally, the 800-pound gorilla of American retail is in a class of its own.

While others have struggled to entice inflation-weary consumers to open their wallets, comparable sales at Walmart US grew 5.3% during the third quarter.

That handily trounced expectations for a 3.7% rise, which is no small feat given Walmart’s size. It pulled in US$648 billion ($1.096 trillion) in revenue last year.

Adding to the flex, Walmart upped its full-year guidance for a second time this year.

True, the stock itself is no bargain after climbing nearly 64% this year.

It trades on a forward price-to-earnings ratio of 33. That beats not only direct rival Target, but also Google parent Alphabet, Facebook owner Meta Platforms and smartphone supremo Apple, according to financial markets data provider London Stock Exchange Group (LSEG).

But this premium is deserved.

Walmart has navigated the challenges of a lukewarm economy and inflation with aplomb by drawing in higher income customers and growing alternative revenue streams.

It continued to take market shares from rivals in both groceries and general merchandise during the third quarter. Upper-income households making US$100,000 ($169,000) a year or more accounted for about three-quarters of the share gains during that period, the company said.

Operating profit is also growing faster than sales thanks to its array of higher-margin side businesses.

These include a third-party online marketplace, digital advertising and an Amazon Prime-like membership scheme called Walmart Plus.

All these are fast growing and more profitable. This has allowed Walmart to keep prices low on food — and even cut them — to drive traffic and put pressure on rivals.

Few other bricks-and-mortar retailers can claim to be able to do the same. Tighter inventory management also contributed to the rise in gross margins during the quarter.

A strong dollar and proposed tariff plans touted by President-elect Donald Trump are some of the potential issues that could hurt Walmart. About a fifth of its sales come from outside the United States and the greenback’s rise this year could reduce the value of its non-dollars earnings abroad.

But these should be more than manageable.

Walmart’s size and diversified business model mean it has managed nearly a decade of uninterrupted like-for-like sales growth. It may not grow as fast as tech, but its prospects do not rely on having to invent whole new business models — and there are fewer regulators with an itch to break it up.

Its shares are unlikely to find themselves in the clearance aisles anytime soon.

© Financial Times