The outlook for Walmart's crucial back to school and holiday shopping seasons still remains far from certain as more shoppers buy "canned tuna and chicken and even beans" instead of deli meats amid eye-popping inflation.
That isn't shaking Goldman Sachs from its bullish rating on shares of the world's largest retailer in the wake of Walmart's mixed second quarter earlier this week.
In a new note to clients, Goldman retail analyst Kate McShane reiterated a buy rating on Walmart shares with a $155 price target, which assumes about 11% upside in the stock from current levels.
"We reiterate our buy rating for Walmart given 1) strong top-line trends along with market share gains; 2) moderating markdown pressure expected from here supported by an improved inventory position, which has been the recent overhang on the stock; and 3) the long-term algorithm (+4% top line and even better operating income growth) remains intact," McShane explained.
McShane lifted her full year profit estimates on Walmart to $5.89 from $5.69 a share, adding markdown pressure seen in the second quarter fueled by inventory clearances should abate. For 2023, McShane estimates earnings of $6.44, roughly 3% higher than her prior modeling.
Despite the uncertainty, Walmart handed bulls like McShane some positives on its earnings day Tuesday.
First, Walmart's same-store sales at its namesake U.S. division and Sam's Club rose a better-than-expected 6.5% and 9.5%, respectively. Execs credited the pullback in gas prices as lifting sales toward the end of the quarter, a trend that has continued into the start of the back to school shopping season.
Second, Walmart revised its full year guidance for profits to drop 9% to 11% from a prior range for a 11% to 13% decline.
Walmart stock, a component of the Dow Jones Industrial Average, are now up 8% over the last five trading sessions compared to a 1.1% loss for the broader index.
That said, Walmart is still battling through consumer challenges that could easily zap recent positive demand trends.
“I'd say that what we're seeing is they [consumers] are still relatively healthy," Walmart CFO John David Rainey told Yahoo Finance. "We've seen some changes in consumer behavior that I put in three categories. One is there's a trade down in both quality and quantity. So instead of buying deli meats, we're seeing things like canned tuna and chicken and even beans, as units were up over 25% in the quarter. They're buying smaller pack sizes to save money. We've seen an increase in the private brands growth effect, it's 2x for food what it was in the first quarter.”