The retailer is handling more customer traffic as we approach the peak holiday shopping season.
Wall Street wasn't thrilled with the latest earnings update from Walmart (WMT -0.05%). Coming as it did on the cusp of the peak holiday shopping period, pro traders were apparently looking for more optimistic comments from the management team regarding the short-term growth forecast.
Yet Walmart in that report raised its 2023 outlook for a second straight quarter while showing some encouraging trends around market share and profits. Let's dive into three reasons why Wall Street overreacted by pushing the stock lower in the wake of that recent earnings report. These are green flags for Walmart's potential for the remainder of 2023.
1. Walmart posted good (but mixed) growth
Sales trends impressed for a third consecutive quarter. Walmart reported a 5% boost in comparable-store sales, marking just a slight slowdown from the prior quarter's 6% increase.
Looking deeper into the results, growth was mixed. Walmart achieved a healthy balance between rising customer traffic and increased average spending. In other words, it didn't have to rely completely on higher prices to boost sales. The retailer continued to win market share in the grocery segment, to the detriment of companies like Kroger, and the health and wellness niche expanded as well.
Yet Walmart's spending growth slowed compared to the prior quarter. Walmart reported declining sales in the general merchandise segment, which focuses more on consumer-discretionary products, as well. That part of the store seemed to be rebounding last quarter, but this update shows that shoppers aren't ready to spend more aggressively just yet.
2. Walmart's cash and profits are on the rebound
The news was more uniformly positive around earnings and cash flow. While Walmart reported a slight drop in operating income in the fiscal third quarter, that pressure only came from a shift in the timing of a sales event. Adjusting for that move translates into another uptick in operating profit margin.
WMT Operating Margin (TTM) data by YCharts.
Shareholders have more to celebrate around cash flow, which jumped higher by $3 billion to $19 billion. Wins here pay off for investors in several ways. Walmart can freely invest in growth initiatives, for one, helping extend its market-share dominance in areas like e-commerce. The resources allow it to maintain price leadership, too, helping lift customer traffic. And cash is supporting direct returns through dividends and stock buybacks.
3. Walmart is guiding for additional growth
Two forward-looking metrics are pointing in the right direction for the business. Start with inventory, which declined by $1 billion to $64 billion. A slight decrease here is evidence that management has a good grasp on current demand trends and is determined to avoid excess inventory heading into the holidays. Executives have to walk a fine line here, though, potentially leaving some cash on the table if inventory is too light by late November.
Meanwhile, the 2023 outlook continues to brighten. Walmart now sees sales rising by 5% to 5.5%, up from the prior range of 4% to 4.5%. That growth guidance started at just 3.5% at the beginning of the year. Management left its earnings forecast unchanged, but shareholders can still expect to see solid profit growth and a modest uptick in operating profit margin.
What should investors do about Walmart?
Shares came into the report running roughly even with the market's 17% return to date. Walmart stock is now a bit behind, up 10% so far in 2023.
Investors should see the current discount as another reason to like this dominant retailer. Walmart is heading into the holiday period with caution around consumer-spending patterns, sure. But customer traffic is strong, and profit margins are rising. Toss in a growing dividend payment and you have all the key ingredients you need for positive investor returns going forward.
Demitri Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Walmart. The Motley Fool recommends Kroger. The Motley Fool has a disclosure policy.
