Walmart (NYSE:WMT) reported stellar second-quarter results Aug. 18. As a result of some impressive numbers from the retailer’s e-commerce business, Walmart stock hit an all-time high of $137.63.
Investors should expect its stock to continue moving higher over the remainder of 2020 and into 2021. Here’s why.
Walmart Stock and the Pathway to Profitability
The last time I wrote about Walmart was way back in Februar,y before the novel coronavirus took hold of both the markets and the economy. At the time, I was concerned that the company’s closure of Jetblack was an indication its e-commerce initiatives had maxed out with profitability sorely missing.
“Morgan Stanley analyst Simeon Gutman projects that Walmart will have $2.1 billion in operating losses in fiscal 2020, higher by $200 million, or 10.5% year-over-year. Gutman thought the retailer’s operating losses from e-commerce would peak in 2020, but now believes that will happen in 2021,” I wrote on February 19.
“… However, I do think Walmart can handle losses from its e-commerce business for several more years without blinking an eye, thanks to the strength of its brick-and-mortar locations in the U.S.”
Fast Forward to Walmart’s Q2 2021 Earnings
Walmart reported Aug. 18 that it grew U.S. e-commerce sales by 97% while its warehouse division, Sam’s Club, grew e-commerce sales by 39%. Even its international sales, which are the company’s weak link, increased by 1.6%. Overall, Walmart’s Q2 2021 sales increased 7.5%, excluding currency, to $137.7 billion.
On the bottom line, Walmart’s adjusted operating income was $6.6 billion, 18.6% higher than its operating profit a year earlier. Things are going so well in fiscal 2021, Walmart’s free cash flow in the first six months of the year is $15.4 billion, 144.4% higher than in the same period a year earlier.
The business was booming May through July. Here’s what former Walmart chief executive officer, Bill Simon, had to say about the quarter:
“It really is an indicator that the consumer is still there and once we sort through all this Covid stuff, they’re willing to spend. I’m particularly impressed by their operating income,” Simon stated on CNBC.
“I’ve been watching that for several years and it’s been challenged as they move their business to digital, to e-commerce, and we see that big growth. Operating income’s been under pressure, but they grew their operating income almost 9%, and even adjusted for currency, in the mid-teens. I mean, that’s phenomenal.”
Simon’s biased, of course, but he’s not off the mark. Walmart has taken a tragic set of circumstances and used its size and scope to gain a stranglehold on consumers. Investors shouldn’t expect this to change in the months and quarters ahead.
“[Y]ou’re going to see good numbers for these guys [Walmart, Home Depot, etc.] for the rest of the year, so do not bite on the idea that this is it, they’re over and they’re coming down. Wait till they come down and then do some buying,” CNBC’s Jim Cramer stated post-earnings.
The Bottom Line on Walmart Stock
In February, I believed the company’s stock was a buy.
At the time, it was trading around $118. It’s up 14% in the six months since. That might not seem like a lot, but considering WMT stock bottomed at $104 in the mid-March correction, it’s really up 30% since March, an impressive run.
I wrapped up my February article by noting:
“If you’re a Walmart shareholder, you ought to be thankful for failures such as Jetblack. It means McMillon and the rest of its management team aren’t afraid to fail. The more failures you have, the more successes you have,” I wrote.
“In my opinion, Jetblack’s failure does not portend bleaker days ahead for its e-commerce business. It does, however, need to show a pathway to profitability within the next 12-24 months. A failure to do that would not be good for Walmart’s stock.”
So, if you’re a shareholder, you’ll love the fact it reported “significantly lower” losses in its U.S. e-commerce business. That portends significant future free cash flow generation and even stronger profits.
If you own, do not sell. Buy a little more now and put some cash aside for a possible correction in the overall markets. Anything under $120 is a great price. Without a market correction, I doubt we get there.
To the victor go the spoils.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
