We walked away from Wal-Mart’s (WMT) investor meeting on Oct. 10 with conviction that the firm’s brand equity and cost advantages can continue to drive economic profits, reinforcing our wide moat rating. In this context, while competitive pressures abound, we think Wal-Mart’s productivity loop (and ultimately its ability to drive per-unit costs lower) is on track, which we surmise should enable the firm to drive sales growth online and in-store, including in the all-important (and fast-turning) grocery category. But after ticking up at a mid-single-digit clip, we think this advantaged position is priced into the stock, which trades in line with our unchanged $83 fair value estimate.
We view management’s focus on accelerating sales without meaningfully increasing its store footprint as prudent (particularly within the U.S.); this is reflected in its fiscal 2019 guidance for 3% top-line growth and 1% unit growth (implying a 2% comparable-store sales increase). While this falls in line with our estimates calling for around 2.6% top-line growth (reflecting 1.6% comparable-store sales and 1% unit growth), we view the firm’s 5% earnings-growth target as underwhelming. However, we aren’t blind to the fact that as retailers look to bolster traffic (to physical stores and online), profit pressure will likely persist.
In this vein, following the tie-up between Amazon and Whole Foods earlier this year, we view Wal-Mart’s efforts to double its click-and-collect grocery service to 2,000 stores by fiscal 2020 as prudent, despite the inherent cost (surrounding investments in in-store technology and staffing). Although Wal-Mart sees e-commerce losses narrowing, supported by 40% U.S. e-commerce sales growth, we anticipate the firm achieving just around 4.8% consolidated operating margins in the long term. This is modestly above fiscal 2017’s 4.7%, but down from 5.6% in fiscal 2015, as pricing pressure and expanding e-commerce penetration dampens profits.
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