If the idea of owning a stake in retailer Walmart(NYSE: WMT) doesn't excite you, that's understandable. It's far from being a growth name. And priced at 26 times this fiscal year's expected earnings, the stock's not exactly a bargain. There are still lots of good reasons to own shares of Walmart anyway. Three of them stand out among the rest.
1. It's the biggest name in retail
The biggest company in any given business isn't inherently the best to invest in. But it would be naïve to pretend a particular company becomes a market leader by sheer dumb luck. In nearly all cases the biggest name in the business got that way by doing something better than the rest.
With that as the backdrop, there's a reason Walmart has been able to become the world's biggest brick-and-mortar retailer. It's been doing things differently since Sam Walton started the company with a single store back in 1962 -- that is, offering shoppers a wide array of products at the lowest-possible price.
Since then, the company has built or bought over 10,000 more stores here and abroad, all of them focused on remaining the low-price leader. That's how Walmart now sells about one-fourth of this nation's groceries, and accounts for a healthy 17% of total retail consumption in the U.S., according to numbers from Capital One.
For perspective, next-nearest competitor Target only operates around 2,000 locations, and reports U.S. sales of less than half of Walmart's. There are also only about 2,750 Kroger-owned grocery stores. Not only does Walmart's dominance underscore that it is doing something right, but it often also discourages rivals from building competing stores in the same area.
2. Walmart is more adaptive and innovative than it seems
With nothing more than a passing glance Walmart looks like the same company it was five years ago, 10 years ago, and even 30 years ago. That's a problem simply because consumers are changing, and retailing is changing with it. Take a closer look, though. Walmart is new and improved in many ways, and not just because it's finally taking e-commerce more seriously.
Consider its foray into advertising as an example. Walmart.com isn't just a place for the company to sell goods (or third-party merchants' goods) online. It's also an advertising platform in and of itself. Walmart generated $3.4 billion worth of advertising revenue last year, with brands paying the retailer to help promote their particular products at Walmart's e-commerce site.
That's outstanding for the relatively young venture. This is also high-margin revenue captured in a way that doesn't dilute or cannibalize Walmart's existing retail efforts.
Meanwhile, the 2020 launch of Walmart+ was a direct jab at Amazon Prime, by offering its members a subscription-based means of free at-home delivery of online orders. While it can't be said that Walmart+ has been a smashing success, it's a sign that at least the company is willing to try new and unusual things. Some of them work.
3. Its sheer scale translates into serious leverage
Last but not least, Walmart's overwhelming size gives it a big advantage over competitors -- not only discouraging grocers like Kroger and discounters like Target from setting up stores nearby, but in other ways too.
Thanks to its broad footprint, Walmart is able to push back on brands when needed. That's exactly what it did a little over a year ago -- telling vendors to curb their own production costs or risk losing placement of their increasingly expensive goods on Walmart stores' shelves. Suppliers mostly responded.
Walmart's huge size also gives it deeper pockets, allowing the retailer to make meaningful acquisitions that others just can't. Case in point: Last month Walmart revealed plans to acquire consumer electronics brand Vizio for a cool $2.3 billion. Walmart is already Vizio's single-biggest retail partner; the deal will allow the retailer to ultimately pocket more of the profit it's already creating just by carrying the company's products in its stores.
Vizio also boasts 18 million users of its SmartCast smart-television operating system. This is a new kind of advertising medium that Walmart should be able to integrate and complement with its nascent advertising business at Walmart.com.
Walmart stock offers low risk, fair reward
Is Walmart a perfect stock pick? No, there are risks to be sure. Its sheer size is one. While it provides clear advantages, the bigger a company gets, the more difficult it is to manage.
This may have been at the heart of nagging inventory shortages and empty store shelves back in 2014. And not every initiative has worked out as hoped. After acquiring men's apparel brand Bonobos back in 2017 for $310 million, it sold the very same brand last year for a mere $75 million. These modest missteps can add up over time.
On balance, though, this retailer wins more than it loses, and is almost a textbook-perfect picture of consistency. Indeed, it hasn't failed to produce year-over-year revenue growth in any quarter since the beginning of 2016, and for the matter, has reported year-over-year revenue growth every quarter for the several years leading up to 2015. That was a regrouping year anyway, shortly after Doug McMillion took the helm as CEO and began implementing long overdue changes.
Bottom line? There may be higher-growth tickers out there. There aren't many other companies, however, with Walmart's size and willingness to simply push through any challenge it might encounter. That alone makes it worth the stock's premium price.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Target, and Walmart. The Motley Fool recommends Kroger. The Motley Fool has a disclosure policy.
