Retail behemoth Walmart (NYSE:WMT) reported results ahead of analysts' expectations in Q1 CY2024, with revenue up 6% year on year to $161.5 billion. It made a non-GAAP profit of $0.60 per share, improving from its profit of $0.49 per share in the same quarter last year.
Walmart (WMT) Q1 CY2024 Highlights:
- Revenue: $161.5 billion vs analyst estimates of $158.1 billion (2.1% beat)
- EPS (non-GAAP): $0.60 vs analyst estimates of $0.52 (14.4% beat)
- EPS (non-GAAP) Guidance for Q2 CY2024 is $0.64 at the midpoint, roughly in line with what analysts were expecting
- Full year guidance: Walmart now expects to be at the high end of the previous ranges given for sales growth (2-3% year on year growth) and EPS ($2.23 to $2.37)
- Gross Margin (GAAP): 24.8%, up from 24.3% in the same quarter last year
- Free Cash Flow was -$427 million, down from $204 million in the same quarter last year
- Same-Store Sales were up 3.8% year on year (slight beat vs expectations of up 3.4% year on year)
- Market Capitalization: $482.2 billion
Known for its large-format Supercenters, Walmart (NYSE:WMT) is a retail pioneer that serves a budget-conscious consumer who is looking for a wide range of products under one roof.
Founded in 1962 by Sam Walton in Bentonville, Arkansas, Walmart is currently one of the world's largest retailers. The company is known for its "Everyday Low Prices" strategy, which is achieved through bulk purchasing, cost efficiency, and optimizing supply chain management.
Walmart serves the value-focused household in suburban and rural areas by offering low prices and convenience. Convenience from the core Supercenter concept stems from offering everything from groceries to clothing to toys to home décor to consumer electronics under one roof. Recent initiatives to add convenience to the Walmart shopping experience include launching the ecommerce site in 2000, online grocery order and physical pickup in 2014, and grocery delivery in 2018.
While the Walmart Supercenter—which can be 200,000 square feet per store—is the most famous format, the company also has smaller formats and other banners such as the Sam’s Club membership warehouse concept. For example, the company launched Walmart Neighborhood Markets in 1998. These stores were meant for more dense urban areas where a large format store would not be feasible, and the limited space was dedicated primarily to groceries and pharmacy services.
Large-format Grocery & General Merchandise Retailer
Big-box retailers operate large stores that sell groceries and general merchandise at highly competitive prices. Because of their scale and resulting purchasing power, these big-box retailers–with annual sales in the tens to hundreds of billions of dollars–are able to get attractive volume discounts and sell at often the lowest prices. While e-commerce is a threat, these retailers have been able to weather the storm by either providing a unique in-store shopping experience or by reinvesting their hefty profits into omnichannel investments.
Scaled competitors that sell general merchandise and/or groceries to US consumers include Amazon.com (NASDAQ:AMZN), Costco (NYSE:COST), and Dollar General (NYSE:DG).Sales Growth
Walmart is a behemoth in the consumer retail sector and benefits from economies of scale, an important advantage giving the business an edge in distribution and more negotiating power with suppliers.
As you can see below, the company's annualized revenue growth rate of 5% over the last five years was weak as its store count dropped, signaling that growth was driven by more sales at existing, established stores.
This quarter, Walmart reported solid year-on-year revenue growth of 6%, and its $161.5 billion in revenue outperformed Wall Street's estimates by 2.1%. Looking ahead, Wall Street expects sales to grow 2.4% over the next 12 months, a deceleration from this quarter.
Same-Store Sales
Same-store sales growth is an important metric that tracks demand for a retailer's established brick-and-mortar stores and e-commerce platform.
Walmart's demand within its existing stores has generally risen over the last two years but lagged behind the broader consumer retail sector. On average, the company's same-store sales have grown by 6.3% year on year. Given its declining store count over the same period, this performance stems from higher e-commerce sales or increased foot traffic at existing stores, which is sometimes a side effect of reducing the total number of stores.
In the latest quarter, Walmart's same-store sales rose 3.8% year on year. This growth was a deceleration from the 7.3% year-on-year increase it posted 12 months ago, showing the business is still performing well but lost a bit of steam.
Gross Margin & Pricing Power
We prefer higher gross margins because they make it easier to generate more operating profits.
Walmart has poor unit economics for a retailer, leaving it with little room for error if things go awry. As you can see below, it's averaged a 24.3% gross margin over the last two years. However, when comparing its margin specifically to other non-discretionary retailers, it's actually pretty decent. That's because non-discretionary retailers have structurally lower gross margins as they compete to provide the lowest possible price, sell products easily found elsewhere, and have high transportation costs to move their goods. We believe the best metrics to assess these types of companies are free cash flow margin, operating leverage, and profit volatility, which take their scale advantages and non-cyclical demand characteristics into account.
Walmart's gross profit margin came in at 24.8% this quarter, flat with the same quarter last year. This steady margin for a retailer like Walmart, which is structurally less profitable than the typical retail business for the reasons mentioned above, signals that it has stable input costs (such as freight expenses to transport goods) and aims to keep prices low for consumers.
Operating Margin
Operating margin is a key profitability metric for retailers because it accounts for all expenses keeping the lights on, including wages, rent, advertising, and other administrative costs.
In Q1, Walmart generated an operating profit margin of 4.2%, in line with the same quarter last year. This indicates the company's costs have been relatively stable.
Zooming out, Walmart was profitable over the last two years but held back by its large expense base. Its average operating margin of 3.8% has been paltry for a consumer retail business. Its margin has also seen few fluctuations, meaning it will take a big change to improve profitability.EPS
Earnings growth is a critical metric to track, but for long-term shareholders, earnings per share (EPS) is more telling because it accounts for dilution and share repurchases.
In Q1, Walmart reported EPS at $0.60, up from $0.49 in the same quarter a year ago. This print beat Wall Street's estimates by 14.4%.
On the bright side, Wall Street expects the company to continue growing earnings over the next 12 months, with analysts projecting an average 3.8% year-on-year increase in EPS.
Cash Is King
If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe in the end, cash is king, and you can't use accounting profits to pay the bills.
Walmart broke even from a free cash flow perspective in Q1. This quarter's result was in line with its margin in same period last year.
Over the last two years, Walmart has shown decent cash profitability, giving it some reinvestment opportunities. The company's free cash flow margin has averaged 2.7%, slightly better than the broader consumer retail sector. Furthermore, its margin has been flat, showing that the company's cash flows are relatively stable.
Return on Invested Capital (ROIC)
EPS and free cash flow tell us whether a company was profitable while growing revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to how much money the business raised (debt and equity).
Walmart's five-year average ROIC was 15.4%, slightly better than the broader sector. Just as you’d like your investment dollars to generate returns, Walmart's invested capital has produced decent profits.
The trend in its ROIC, however, is often what surprises the market and drives the stock price. Over the last few years, Walmart's ROIC averaged 1.2 percentage point increases. This is a good sign, and if the company's returns keep rising, there's a chance it could evolve into an investable business.
Balance Sheet Risk
Debt is a tool that can boost company returns but presents risks if used irresponsibly.
Walmart reported $9.41 billion of cash and $43.25 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company's debt level isn't too high and 2) that its interest payments are not excessively burdening the business.
With $39.84 billion of EBITDA over the last 12 months, we view Walmart's 0.8x net-debt-to-EBITDA ratio as safe. We also see its $980 million of annual interest expenses as appropriate. The company's profits give it plenty of breathing room, allowing it to continue investing in new initiatives.
Key Takeaways from Walmart's Q1 Results
We liked that Walmart's revenue outperformed Wall Street's estimates on slightly higher-than-expected same-store sales growth. Gross margin also came in better, leading to an EPS beat. The company effectively raised its full year guidance, saying that it now expects to come in at the high end of the previously-provided sales and EPS guidance ranges. Overall, we think this was a really good quarter that should please shareholders. The stock is up 5.4% after reporting and currently trades at $63.07 per share.
Is Now The Time?
Walmart may have had a good quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.
Walmart isn't a bad business, but it probably wouldn't be one of our picks. Its revenue growth has been a little slower over the last five years, and analysts expect growth to deteriorate from here. And while its coveted brand awareness makes it a household name consumers consistently turn to, the downside is its gross margins make it more challenging to reach positive operating profits compared to other consumer retail businesses. On top of that, its declining physical locations suggests its demand is falling.
Walmart's price-to-earnings ratio based on the next 12 months is 24.8x. We can find things to like about Walmart and there's no doubt it's a bit of a market darling, at least for some investors. But it seems there's a lot of optimism already priced in and we wonder if there are better opportunities elsewhere right now.
Wall Street analysts covering the company had a one-year price target of $65.47 per share right before these results (compared to the current share price of $63.07).
To get the best start with StockStory, check out our most recent stock picks, and then sign up to our earnings alerts by adding companies to your watchlist here. We typically have the quarterly earnings results analyzed within seconds of the data being released, and especially for companies reporting pre-market, this often gives investors the chance to react to the results before the market has fully absorbed the information.