After a few attempts to rally above the $100 level, Walmart (NYSE:WMT) continues to float in the high $97 range. Relatively high valuations may partly explain why investors are not committed to buying the WMT stock at this time.
Despite introducing plenty of new technology to compete effectively against Amazon.com (NASDAQ:AMZN), investors are in a wait-and-see mode first. Fortunately, Walmart is ready to prove to the market that it is worth more.
Walmart is pushing out more self-checkout because customers love it. And WMT stock investors should, too. At Sam’s Club, when customers check-out with the technology, staff will spend their time on the sales floor to help customers. This boosts customer satisfaction levels, improving loyalty and adding to long-term sales growth. The beauty of enhancing the experience at the stores is that it differentiates Walmart from online retailers like Amazon.com.
Wage inflation might worry Walmart stock holders as the retailer commits to in-store sales staff. But online firms face the same wage pressures, but instead of having more sales staff, they have more in technology or at the warehouses.
Walmart continues to focus its strategic efforts on grocery pricing and product variety. At the UBS Global Consumer retail conference, U.S. CEO Greg Foran explained the strategy around offering plenty of choices, like nine varieties of Ritz Crackers. And the effort for keeping its store business strong is not deterring Walmart from growing its online initiatives. Three years after rolling out the online grocery pickup initiative, it figured out all the operational complexities related to the launch.
That Walmart launched an online pick-up at more than 1,000 stores is impressive. In that process, it figured out all the training requirements, payment systems and such things as the nuances around food that required refrigeration during storage. All the while, Walmart continued to keep its focus on making the entire system profitable.
Opportunity for Growth
WMT stock investors may expect revenue growth the company adds more general merchandise availability for online grocery shopping. Operational efficiency will also grow as will economies of scale. Most importantly, consumers will have online as another channel for shopping, when they do not want to go to the physical stores.
The retailer makes no presumptions that even though 90% of the U.S. population lives within 10 miles of a Walmart store, it will hold its market share. The Bentonville, Arkansas company keeps a competitive advantage to ensure customers will want to come back. So, for 2019, improving the customer experience and keeping a fresh product offering will justify the current WMT stock valuation.
Higher Profit Margins
Efforts to increase the mix of proprietary products on shelves will pay off this year. This explains how the company forecast comparable store growth of 2.5% to 3% despite harder year-over-year comparisons. Instead of raising prices, which could hurt customer traffic, Walmart has its own products that lift results. It will also maintain a favorable price advantage over competitors.
Investors should note the one short-term headwind to profitability, which is expected to decline by the low single-digit percentage. This is due to Flipkart’s inclusion in results.
Per Tipranks, 16 analysts covering Walmart stock have an average price target of $112.43, suggesting an upside of more than 16% from current levels. Although WMT stock pays a small dividend yielding 2.18% and a P/E of 43x, value investors may want to wait for the stock to fall back to the low $90’s before starting a position.
Bottom Line on Walmart Stock
Walmart management has a good balance between increasing shareholder returns and investing for growth. The company generated strong cash flow of $27.8 billion and EPS grew 11% to $4.91 last year. It also returned $13.5 billion to shareholders with Walmart stock repurchases (and including dividend payments). Even so, management is not satisfied with those results.
Walmart has the financial muscle to invest conservatively to grow the online grocery pickup business. The importance of the $16 billion investment in Flipkart will become clear over time. With Walmart management’s proven experience, Flipkart will give the retailer a starting entry point for long-term growth in India. That won’t be a bad thing for WMT stock.
Disclosure: As of this writing, the author did not hold a position in any of the aforementioned securities.