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Walmart Has the Scale and Infrastructure to Generate Positive Gains
As the world's largest retailer, Walmart Inc. (NYSE:WMT) has economies of scale that no company can match. With approximately $573 billion in global revenues and $429 billion in wholesale purchases, the company has incredible buying power. Its infrastructure assets include 210 distribution centers, a fleet of 9,000 tractors, 80,000 trailers and more than 11,000 drivers. Each distribution center is more than 1 million square feet in size and employs approximately 600 personnel unloading and shipping over 200 trailers daily.
The company has approximately 230 million customers and members that visit 10,500 stores and clubs under 46 store brands in 24 countries and various e-commerce websites. Walmart employs about 2.3 million people on a worldwide basis.
E-commerce
Walmart is investing heavily in the e-commerce space and is second only to Amazon.com Inc. (NASDAQ:AMZN) in terms of online revenue. However, Walmarts growth rates have been higher than Amazon with a two-year stacked growth rate of approximately 90%, which includes the pandemic e-commerce growth. Online websites include brands such as Walmart.com, Samsclub.com and Moosejaw.com domestically and Walmart.com.mx and Asda.com in international markets, just to name a few.
Annual results
Walmart reported its financial results for the fiscal year ending Jan. 31 on Feb. 17 of this year. Results were mostly positive as revenue grew 2.4% with U.S. same-store sales increasing 6.4%. As noted above, e-commerce sales were strong, increasing 11% against very strong pandemic-driven growth in the prior year. Sam's Club, which represents 13% of total company sales, increased 9.8% with membership income increasing 11.3%. Adjusted earnings per share, which excludes one-time or unusual items, came in at $6.46 compared to $5.48 in the prior year.
The company generates significant cash flow as operating cash flow was $24.2 billion for the year and, with capital expenditures at $13.1 billion, free cash flow totaled $11.1 billion. Total return to shareholders for the year was $6.2 billion in dividends and $9.8 billion in share repurchases. Cash balances as of Jan. 31 was $14.8 billion and total debt stood at $38 billion. The companys debt rating remains firmly investment grade with double-A ratings across the board.
Guidance for the fiscal year ending Jan. 31, 2023 was also provided and called for 4% constant currency consolidated sales growth (excluding divestitures) and operating income growth at higher rate than that. Earnings per share growth should be in the mid-single-digit range for the year. Capital expenditures should be at approximately 3% of net sales with a focus on supply chain, automation, customer-facing initiatives and technology.
Valuation
Walmart sells at valuation levels somewhat above historical averages, as well as for large mature retailers. Based on analyst estimates for the fiscal year of $6.76, Walmart stock sells as a price-earnings ratio of 20. Looking ahead to the following year, the price-earnings ratio drops to approximately 18. However, its important to note that the company is investing heavily in e-commerce and some analysts estimate that on a stand-alone basis, the digital business is losing approximately $1 billion annually. If we assume this digital investment spending creates long-term value and future growth opportunities for Walmart, then the current valuation multiples may not be excessive.
The company currently pays an annual dividend of $2.24, which equates to a 1.64% dividend yield that is slightly above the S&P 500's dividend yield.
Guru holdings
Gurus that have added to their stakes in Walmart over the past six months include Joel Greenblatt (Trades, Portfolio) and the T Rowe Price Equity Income Fund (Trades, Portfolio). Recent reductions include Mario Gabelli (Trades, Portfolio), David Tepper (Trades, Portfolio) and Ken Fisher (Trades, Portfolio).
Conclusion
Walmart appears to be fairly valued at these levels. For true long-term investors looking out well beyond the next few years, however, its likely the stock will continue to show strong gains over time. The company has strong brand awareness, international growth and an asset infrastructure base that will not likely be duplicated by the competition.
This article first appeared on GuruFocus.
