3 Reasons Why Walmart Is a Major Winner Compared to Other Retailers. Is it time to buy the stock?

Walmart (WMT 0.16%) certainly seems to be firing on all cylinders these days. Its second-quarter results were so strong, in fact, that the stock hit an all-time high immediately after the recently released report. Moreover, based on Walmart’s strong Q2 numbers, investors are deciding that the economy and consumerism are healthier than assumed less than a week ago. This bodes well for rival retailers such as Aim and Kroger.

Just because Walmart is winning in a challenging environment, however, doesn’t actually mean its competitors are doing as well. This company is different from other comparable chain stores. Namely, it is better positioned to thrive regardless of the economic context.

But that still doesn’t make the stock a buy now.

An encouraging quarter

For the three months ended July, Walmart turned $169.3 billion in revenue into earnings of $1.67 per share. This is an increase from the prior year comparisons of $161.6 billion and $0.61, respectively, and better than the top line of $168.5 billion and the bottom line of $0.65 per share that analysts expected. While grocery sales drove most of the quarter’s growth, same-store sales growth (US, excluding fuel) rose to 4.2%. E-commerce revenue grew 21% and gross margins improved.

In other words, it was a solid quarter — solid enough for Walmart to raise its revenue and full-year earnings guidance, and solid enough for CFO John David Rainey to comment during the second-quarter earnings call : “We haven’t seen any additional pressure on consumer health in our business.” Analysts and investors alike readily applied this observation to the businesses of other retailers.

Perhaps this is a reasonable assumption.

It would also not be unfair to assume, however, that Walmart is doing better than its rivals by taking advantage of its large size and subsequent capabilities. Three details from the retailer’s Q2 report subtly demonstrate this superiority.

3 signs Walmart is doing better than the competition

First, Walmart’s inventory levels continue to decline, reaching levels not seen since before the COVID-19 pandemic took hold. At the end of last month, the company’s inventory-to-sales ratio was 32.8%, down from a 2022 peak of 42.7%.

On the surface, it seems problematic — you can’t sell merchandise you don’t have. But that’s not the big risk in retail. The real risk is loading up with more goods than you can sell, leaving less room (and money) for more tradable goods. Also, the longer stock sits on a store’s shelves, the more likely it is to be stolen, damaged or lost.

As the chart below shows, Walmart — like most other retailers — loaded up on inventory in the final days of the pandemic in anticipation of a post-pandemic spending surge that simply never materialized. Gross profit margin rates unsurprisingly fell shortly thereafter. As inventory levels have reduced to more historic levels, gross margins have also returned to normal.

Data source: Walmart Inc. Chart by author.

It’s a sign that Walmart is once again in control of how much merchandise it needs at any given time, and which the goods he needs at any time. While they are certainly trying, it remains to be seen if the competition is able to follow suit.

Second, although investors are not privy to the details, Walmart disclosed that revenue from its global advertising business improved 26% year-over-year, with that business growing 30% in the United States alone.

If you don’t know, the world’s largest chain store doesn’t just make money by selling goods online and offline. Its shopping site also allows brands and third-party sellers to pay to promote their products on Walmart.com. The company doesn’t regularly release many details about this operation, other than to provide a relative growth figure. However, Walmart disclosed in early 2022 that it did $2.1 billion worth of digital advertising business the previous year. That business has grown at a pace comparable to last quarter every year since.

Obviously, it is still not a key source of income. This is a high-margin income, however, using a Walmart online shopping platform would work regardless of whether it was monetized with ads or not. For perspective, although the retailer did $169 billion in business last quarter, operating income was just $7.9 billion. The effect of its advertising arm on the bottom line is not insignificant.

It matters simply because Walmart.com is a major e-commerce destination, second only to Amazon within the United States. No other competitor will come close to matching Walmart’s online shopping pull. It’s just too big and too present.

Finally, while the company continues to be coy about specifics, Walmart+ memberships grew by double digits (again) last quarter, producing a 23% increase in member revenue.

The benefit of a growing Walmart+ customer base is not readily apparent. But it’s there if you dig deeper. With this crowd taking advantage of their free shipping and delivery offer, total US store transactions last quarter improved 3.6% year-over-year. E-commerce growth has also been driven by in-store fulfillment and delivery, which in some cases can be completed the same day the order is placed.

Again, it’s a business-building success that other brick-and-mortar rivals will struggle to replicate simply because they don’t enjoy Walmart’s reach or the depth of its inventory.

To buy or not to buy?

So does the company’s superior competitive position make the stock a buy? Don’t be too quick to make that move.

You see, while investors should expect to pay a premium for quality picks, this high-quality name remained unquestioned after the release of its second-quarter numbers. Walmart’s stock price is currently more than 27 times next year’s expected earnings. Even if this consensus estimate underestimates what’s actually in store, this stock is still uncomfortably expensive compared to its historical norm.

Don’t be too stingy and don’t wait too long to intervene. A slight cooling of further earnings growth may be all the pullback is here. It’s becoming increasingly clear that the new and improved Walmart is built to thrive in any and all economic environments. Investors are highly unlikely to let this ticker fall much before they start buying it again. It just promises a stock.