When does a huge, slow-growing retailer become a hot stock? In the middle of a pandemic. Walmart (NYSE:WMT) stock is up 5% in 2020, while the average stock in the S&P 500 is down almost 10%, because it delivers earnings through the novel coronavirus lockdown.
That is, it literally delivers them. The company said ecommerce sales were up 74% in its April quarter report. Walmart earned $4 billion, $1.40 per share fully diluted, on revenue of $134.6 billion during the quarter. All of these things have helped Walmart stock shine in 2020.
Meanwhile, net income was up just 5%, and revenue was up 8.6%. Analysts focused on the fact that U.S. store sales were up 10.5% and that ecommerce number. It was called a “big beat.”
What’s Happening at Walmart?
Analysts differ on whether these numbers make Walmart a growth stock.
TV analyst Jim Cramer said that, in a “survival of the fittest economy,” Walmart is a winner. Companies like Walmart, Home Depot (NYSE:HD) and Costco Wholesale (NASDAQ:COST) are “essential services” during the pandemic, crushing smaller competitors.
But if Walmart is so great, what is Costco doing in that list? Walmart has its own warehouse club, Sam’s Club. Sam’s Club delivered $15 billion in revenue during the April quarter, but Costco sales are nearly $40 billion/quarter. Costco has 782 warehouses against 599 for the Walmart unit. That’s 2.5 times the sales volume from from 30% more stores.
And about that huge ecommerce gain? Much of that revenue remains pick-up from stores. That’s safer during a pandemic, but it’s stolen from in-store revenue. Walmart has now added two-hour delivery, again from the stores. That may be why, right after Walmart’s numbers came out, Walmart stock rolled over.
Still, many analysts are calling Walmart’s quarter evidence of a fundamental change in consumer behavior. One-third of consumers surveyed by Pymnts said they’re shopping just as often as before, only they’re doing it online.
What should continue powering Walmart forward is the speed of its delivery from stores, and the ubiquity of that store network. Some 90% of Americans now live within 15 minutes of a Walmart. By building its delivery service around the stores, Walmart took advantage of that ubiquity.
What’s Wrong with Walmart?
While Walmart had a great quarter, and analysts think gains will continue after the virus has passed, it still withdrew guidance on the rest of the year.
There are weaknesses in the Walmart story. Sam’s Club is just one of them.
Walmart has quietly given up on competing with Amazon (NASDAQ:AMZN) in entertainment. Late in April, it sold its Vudu streaming unit to Fandango, formerly known as Movietickets.com. Fandango is a joint-venture between last-mile duopolists Comcast (NASDAQ:CMCSA) and AT&T (NYSE:T).
Another weakness is private label brands. Most are ho-hum, like Sam’s Choice and Great Value, geared at undercutting name brands on staples. Target (NYSE:TGT) is way ahead of it in this area. Only in 2018 did Walmart begin copying Target’s idea of in-store clothing brands. One of the most popular is Terra & Sky, for plus-size women.
The Bottom Line on Walmart Stock
Because of its size, $524 billion in sales during 2019, Walmart must run very fast to maintain single-digit growth. Its 8.6% growth in the first quarter was achieved at the expense of profits, up just 5.2%. It remains tied to consumer basics. When appetites turn back toward high-end goods it has little to offer.
Walmart adapted very well to the pandemic, but investors always look ahead. Walmart has a price-to-earnings ratio of 24, well above the current market average of 21. The 54 cent per share dividend, once thought generous, now yields just 1.73%.
Today, Walmart stock is a safe place to park money. It will have to evolve again for that to remain the case once the pandemic is over.
Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN.