Walmart Stock Is Strong Enough to Withstand an Increased Tariff Hit


Walmart stock - Walmart Stock Is Strong Enough to Withstand an Increased Tariff Hit

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Retail giant Walmart (NYSE:WMT) isn’t too happy about the Trump administration enacting tariffs on Chinese imports and potential buyers of Walmart stock wonder how bad things could get.

Walmart recently wrote a letter to U.S. Trade Representative Robert Lighthizer, in which the company detailed how expanded tariffs on Chinese imports would adversely impact the retailer, its customers, and the U.S. economy. The short of it: tariffs will force Walmart to raise prices, which could have a negative affect on consumers, consumer spending, and U.S. economic activity.

If tariffs seem like a negative for Walmart stock, it’s because they are. Tariffs mean either Walmart has to absorb higher costs and operate at lower margins, or they have to raise prices. Walmart has made it clear that they will raise prices. Walmart, whose biggest value props are all-in-one convenience and “Everyday Low Prices,”stands to lose a sizable amount of traffic if prices go up.

Thus, tariffs are a headwind for Walmart stock.

But, these tariffs aren’t that wide-sweeping yet. And, on the positive side, the U.S. economy is doing really well right now, with consumer strength and confidence at nearly two-decade highs. That strength and that confidence provide strong tailwinds for Walmart. Importantly, those tailwinds are wide-sweeping today.

Overall, then, I think Walmart stock is a buy here because consumer strength tailwinds will inevitably offset tariff headwinds in the near-term. The result should be strong holiday sales for Walmart, and strong holiday sales should power a big end-of-year rally.

Consumer Tailwinds Will Offset Tariff Headwinds

The narrative at Walmart is pretty good right now.

This is a retailer that was being left in the dust by Amazon (NASDAQ:AMZN). Essentially, Amazon was beating Walmart at its own game, maximizing convenience and minimizing price.

But, Walmart didn’t sit idly by while Amazon took over retail. Instead, Walmart has invested big into growing its ecommerce business, expanding omni-channel capabilities, expanding product assortment, and improving the shopping experience.

Those big investments have paid off. Now, Walmart is reporting its best comparable sales growth numbers in over a decade.

Positive momentum in this narrative is threatened by tariffs. But, at this point in time, such fears seem overstated.

Tariffs aren’t that wide sweeping yet. While the recent $200 billion in tariffs does affect some core Walmart products like shampoo, handbags, backpacks, calculators, vacuum cleaners, and bicycles, the total impact is still rather small.

Of Walmart’s $500 billion in sales, it is estimated that $50 billion is tied to Chinese imports. And, not all Chinese imports have been hit with tariffs. Thus, the percentage of products on which Walmart will have to raise prices is far less than 10%. Indeed, that number is likely closer to 5% or lower.

That is a small number of items.

Meanwhile, the U.S. economy is growing at its best rate in years, and consumer strength and confidence are at essentially two-decade highs. Those are wide-sweeping tailwinds. Almost every U.S. consumer is feeling the benefit of this pick-up in economic activity.

As such, it seems obvious to me that this holiday season still be big, regardless of tariffs.

Walmart Stock Could Push Through $100

Based on the notion that Walmart is back-on-track to maintain its brick-and-mortar retail dominance, and that the company will continue to gain share in the rapidly growing e-commerce market, I have long maintained the view that Walmart stock is worth around $100 today.

By the end of the year, I expect sentiment in Walmart to improve. Right now, tariff headwinds are weighing on the stock. The market has largely forgotten about last quarter’s record numbers (the stock is 3% off post-earnings highs).

This is a near-term phenomena. As we inch closer towards the holiday season, investor focus will shift from tariffs to holiday sales. If early reads on the holiday season are strong (as I expect them to be), then sentiment on WMT stock will improve.

When sentiment on Walmart is strong, this stock tends to trade above fair value. See holiday 2017, when it jumped from $80 in September 2017 to $110 by January 2018.

We could get a similar rally here. I wouldn’t be surprised to see WMT re-test those January 2018 highs over the next several months given a favorable consumer backdrop heading into the holiday season. As such, I reasonably see another 15% upside over the next few months.

Bottom Line on Walmart Stock

I’m not a huge fan of Walmart stock. The fundamentals are improving, and the stock seems slightly undervalued. That is a good, but not great, combination.

The bull thesis on WMT, however, is predicated on the idea that holiday 2018 will be one for the record books, and that such a strong holiday season will temporarily suppress tariff-related fears and send the stock way higher. As such, I think you buy Walmart here for a big end-of-year rally.

As of this writing, Luke Lango was long WMT and AMZN. 

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