Over the past three years, shares of mega-retailer Walmart (NYSE:WMT) has rallied more than 60%, including a 25%-plus surge in Walmart stock in 2019.
Of Course, things weren’t always pretty for this red hot retailer. Once upon a time, the consensus belief on Wall Street was that eCommerce titan Amazon (NASDAQ:AMZN) was going to eat Walmart’s lunch.
That never happened. Instead, after a brief period wherein Walmart suffered from Amazon competition, the former adapted. Walmart leveraged its unparalleled size, reach, physical footprint, and resources to update its stores, build out a robust eCommerce business, expand its omni-channel capabilities, and ultimately maintain its leadership position in the global retail market. Through all these improvements, WMT stock has rattled off a 60%-plus gain over the past three years.
This rally in WMT stock won’t end anytime soon. Instead, Walmart stock actually looks positioned to have a big surge this holiday season.
As such, I say stick with WMT stock for the foreseeable future. Prices above $120 and closer to $130 look entirely possible by the end of the year.
Walmart Is on Fire
There really is no other way to put it: Walmart is absolutely on fire right now.
Long story short, Amazon was kicking Walmart’s butt in 2015-16. Amazon introduced this new way to shop without ever leaving your home. Consumers loved it. Walmart didn’t offer it as well as Amazon did. So, consumers left Walmart stores and shopped on Amazon.com.
During this stretch, Walmart’s comparable sales growth fell flat, while traffic growth went negative and margins came under tremendous pressure.
But, in kicking Walmart’s butt, Amazon woke up the sleeping giant in the retail world. That is, Walmart didn’t just sit on its hands and let Amazon steal share. It responded, swiftly, by taking all of its resources and building out a robust digital channel.
Walmart complemented that digital channel by leveraging its huge physical retail footprint to expand omnichannel capabilities and improve logistics. Further, they updated stores, expanded their product offerings, used data to run smarter promotions, so on and so forth.
In essence, Walmart simply used data and technology to become a better retailer. The results speak for themselves. Since 2017, Walmart has rattled off a string of big comparable sales growth quarter, all of which have importantly included strong traffic growth. Margins have stabilized. Profit growth has come back into the picture. WMT stock has soared.
All of these dynamics remain robust today. Walmart continues to expand its product assortment, doubling down on exclusive brand launches. They continue to enhance convenience, recently rolling out unlimited grocery delivery plans everywhere and bringing same-day delivery to Mexico. They continue to update stores, recently unveiling a brand-new, better-than-ever super-center redesign in Georgia.
Net-net, Walmart has been, still is, and will remain on fire in the global retail market. So long as that market continues to grow, so will Walmart’s revenues and profits, and Walmart stock will continue to rise.
The Holiday Season Will Be Big
The retail market will continue to grow for the foreseeable future, and should be especially strong this holiday season, providing a nice end-of-year boost for Walmart stock.
There are four things here. First, U.S. retail sales are up 3.8% year-over-year over the past 3 months. That’s a fairly strong reading. Thus, all the U.S. retail market has to do is sustain current strength.
Second, labor conditions remain supportive of the idea that the U.S. retail market will do just that. That is, the U.S. economy has continued to add basically 100,000-plus jobs every month this year, while the unemployment rate has dropped to 50-year lows and wages have been rising by ~3% all year long.
Thus, you have a U.S. labor market wherein everyone is working, and everyone is making more money. That’s a healthy combination.
Third, rates are low, and only going lower. Many parts of the Treasury yield curve are already at or near all-time lows, while the Fed Funds target rate is also near historic lows. Further, because the U.S. economy is slowing, it’s widely expected that the Fed will cut rates even more later this year. If so, borrowing conditions should remain highly favorable for U.S. consumers into the end of the year.
Fourth, last year’s holiday season was a dud (+2.1% sales growth, versus a five year average of 3.7% growth), despite favorable labor conditions, because consumers were concerned about recession talk. That likely won’t repeat. Instead, consumers, who now have bigger paychecks, will likely spend those paychecks this year because they didn’t spend them last year.
Big picture: the 2019 holiday retail season should be pretty good, meaning Walmart should report strong holiday numbers – the likes of which should push WMT stock higher into the end of the year.
Bottom Line on Walmart Stock
Buy Walmart stock for a nice end of year rally. The stock is reasonably valued. The company is firing on all cylinders. And, macro-conditions imply that the 2019 holiday season could be quite good for retailers.
As of this writing, Luke Lango was long WMT.
