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Walmart (WMT) is gaining traction with higher-income shoppers and expanding profit drivers like advertising, memberships, and its Sam's Club business. Mizuho Americas director and senior analyst David Bellinger joins Asking for a Trend to explain why he sees Walmart as the "complete package" and why downside risks appear limited.
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Let's get to some specific picks, David. You mentioned Walmart. I saw that you initiate this one as an outperform. So you're a believer here. You told your clients, uh, delivering the complete package. What do you mean by that, Da David?
Yeah, thanks for the question here. So we see multiple ways to win with Walmart. So the the biggest piece, you've got this core business that's really benefited from consumer trade down and a majority of the share gains that Walmart's picked up over the past year or two, they've been upper income consumers. So that that's been pretty well documented. You've got the Walmart plus program where consumers pay $98 a year. You've seen a lot of people step into that. We think they have about 20 million paying customers. Also Walmart, this story has become really about the alternative revenue lines within the business. And those are advertising, membership, which you just mentioned, and marketplace. And those are the fastest growing pieces of the business and they also layer in the highest incremental margin rate.
So just think of Walmart, $700 billion global retailer, company's been around a 4% operating margin. We see a path to get well north of 5% and it doesn't sound like a huge difference, but on that revenue base, there's massive EPS potential. So if you're talking about $2.55 or so at the midpoint of their guidance range this year, you could easily see Walmart be well north of $4 per share.
If investors want to pay a premium for that, this will be coming more and more visible. And then one last piece here, you've also got what we think is somewhat of an overlooked Sam's Club business. Very similar to Costco. We think they have about 30 million members and those are powering a really nice, uh, you know, highly uh, incremental margin into the overall mix of the business. So it's it's not just the core Walmart, they've got plenty of other drivers as well. That that's why we refer to as the complete package here.
And David, you made a convincing case there, but before I pile in, how would you explain downside risk to this one?
Yeah, it's a good question. So everyone's going to be hit and some kind of a consumer slowdown. Right? We we do think Walmart is well insulated here. They've got the tariff offset, plus you've got more than 60% of the business relates to grocery, consumables type items. So more non-discretionary. So you've got a good core base there, but if if sales were to slow, they'll get hit like everyone else. We we think they'll have relatively better numbers, but we frame the downside scenario for Walmart at about $75 per share. And that's that's as you get sales to slow a bit, but you've also got these margin offsets and these creative pieces of the business that aren't fully tied to the macro, somewhat secular, just given their early stage growth stories.
