Walmart's Crushing It - From Markdown Mayhem To Margin Magic

Core Viewpoint - Persistent inflation has led to a significant divergence in consumer behavior, benefiting companies like Walmart while impacting others like Target [2][3]. Company Performance - Walmart's total return over the past ten years is 241%, outperforming Target by 16 percentage points [2]. - The company's stock has risen by 37% since July 6, 2023, surpassing the S&P 500's 26% return [3]. - Walmart's blended P/E ratio is currently 30.3x, significantly above its normalized P/E ratio of 18.5x [4][13]. Growth and Strategy - Analysts project 9% EPS growth for the current fiscal year, with expectations of 10% and 12% growth in FY2026 and FY2027, respectively [6]. - Walmart reported 5.7% sales growth and a 12.9% increase in adjusted operating income on a constant currency basis [6]. - Comparable store sales in the U.S. increased by 3.8%, driven by transaction and unit volumes rather than just pricing [7]. - E-commerce sales contributed 280 basis points to sales growth, indicating successful online expansion [7]. - The company has 420 million SKUs in its marketplace, enhancing growth in specific categories like sporting goods and beauty products [8]. Margin and Inventory Management - Walmart achieved a 2.7% decline in global inventory, optimizing stock levels and reducing markdowns, resulting in a 42 basis point increase in gross margin [8]. - The company has increased rollbacks by 45% in the first quarter, allowing it to test price sensitivity among consumers [8]. Technological Integration - Walmart is implementing advanced technologies, including generative AI-driven product search and automated storage systems, to enhance its supply chain [8]. - The company is expanding same-day delivery services and on-demand early morning delivery [8]. Advertising and Customer Base - Advertising revenue grew by 24%, with Walmart Connect's growth at 26% in the U.S. and 27% internationally [9]. - Walmart's strategy has attracted higher-income consumers, with a customer base now including those earning over $100,000 annually [10]. Private Label Brands - Private-label brands account for approximately 20% of total sales, offering higher margins and performing well during inflationary periods [11]. Store Remodeling and E-commerce - The company is remodeling 650 stores this year to enhance the shopping experience and support surrounding e-commerce sales [11]. - Integration of advertising, data monetization, and fulfillment services is creating a profitable ecosystem, despite challenges in first-party e-commerce [12]. Long-term Guidance - Walmart expects to grow revenue by roughly 4% per year over the next five years, with operating income projected to grow by up to 8% annually [13]. - Analysts have a consensus price target of $72.80, indicating a 4% upside from the current price [14]. Dividend and Valuation - The company has increased its dividend by 9.2% earlier this year, currently paying $0.2075 per share per quarter, with a five-year dividend CAGR of 2.6% [14]. - Walmart has a low payout ratio of 33%, supporting its strategy for elevated earnings growth [14].