3 Reasons Why Walmart Is a Big Winner Compared to Other Retailers. Is It Time to Buy 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 shares hit an all-time high immediately after the recently released report. Plus, based on Walmart’s strong second-quarter numbers, investors are deciding that the economy and consumer sentiment are healthier than they thought less than a week ago. That bodes well for rival retailers like Target And Kroger.

Just because Walmart is thriving in a tough environment doesn’t mean its competitors are thriving too. The company is clearly different from other comparable store chains. It is better positioned to thrive in any economic environment.

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

An encouraging quarter

In the three months ending in July, Walmart turned $169.3 billion in revenue into $1.67 in earnings per share. That’s up from the year-ago comparisons of $161.6 billion and $0.61 in earnings per share, and better than the $168.5 billion in revenue and $0.65 in earnings per share that analysts had expected. While grocery sales drove most of the quarter’s growth, same-store sales (U.S., excluding fuel) grew 4.2%. E-commerce revenue rose 21%, and gross margins also improved.

In other words, it was a strong quarter—strong enough for Walmart to raise its full-year revenue and profit forecasts, and strong enough for CFO John David Rainey to comment on its second-quarter earnings call: “We didn’t see any additional pressure on consumer health across our business.” Analysts and investors have been quick to apply that observation to other retailers.

This may be a reasonably fair assumption.

It wouldn’t be unfair to think that Walmart is doing better than its competitors by leveraging its size and capabilities. Three details from the retailer’s second-quarter report subtly demonstrate this superiority.

3 Signs That Walmart Is Doing Better Than Its Competitors

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

At first glance, this may seem like a problem: You can’t sell merchandise you don’t have. But that’s not the big risk in retail. The real risk is ending up with more merchandise than you can sell, leaving less room (and money) for more marketable merchandise. Plus, the longer inventory 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, stockpiled inventory in the final days of the pandemic in anticipation of a post-pandemic spending surge that never materialized. Gross margins unsurprisingly plummeted shortly thereafter. With inventory levels returning to more historical levels, gross margins have also returned to normal.

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 it needs at any time. Even if it makes efforts, it remains to be seen whether its competitors will be able to follow suit.

Second, while investors don’t know the details, Walmart revealed that revenue from its global advertising business increased 26% year over year in the most recent quarter, with that business growing 30% in the U.S. alone.

If you don’t know, the world’s largest brick-and-mortar retailer doesn’t just make money selling merchandise online and offline. Its shopping website also lets brands and third-party sellers pay to advertise their products on Walmart.com. The company doesn’t often provide much detail on this operation, other than to provide a relative growth figure. Walmart did, however, reveal in early 2022 that it had generated $2.1 billion in digital advertising activity in the previous year. That activity has grown in line with the previous quarter every year since then.

This is not yet a core revenue stream, of course. But it is a high-margin revenue stream, and it relies on an online shopping platform that Walmart would operate, whether or not it is monetized by ads. For comparison, while the retailer had revenue of $169 billion in its most recent quarter, its operating income was just $7.9 billion. The impact of its advertising arm on the bottom line is not insignificant.

This is important simply because Walmart.com is a major e-commerce destination, second only to Amazon in the United States. No other competitor will be able to match Walmart in terms of online shopping appeal. Walmart is simply too big and too present.

Finally, while the company also continues to remain tight-lipped on specifics, Walmart+ memberships grew double-digits (again) in the most recent quarter, generating 23% growth in membership revenue.

The benefit of a growing Walmart+ customer base isn’t obvious. But it’s there if you dig a little deeper. With that customer base taking advantage of their free shipping and delivery offering, total transactions in U.S. stores in the most recent quarter increased 3.6% year over year. E-commerce growth was also driven by in-store fulfillment and delivery, which in some cases can be completed the same day an order is placed.

Again, this is a business success that other traditional competitors will have a hard time replicating, simply because they don’t have Walmart’s reach or depth of inventory.

To buy or not to buy?

So the company’s superior competitive position justifies buying the stock? Don’t rush into making this decision.

While investors should expect to pay a premium for quality picks, this high-quality name has arguably become out of reach following its second-quarter results. Walmart shares are currently valued at more than 27 times next year’s expected earnings. Even if that consensus estimate understates what’s actually in store, the stock remains uncomfortably expensive relative to its historical norm.

We shouldn’t be too stingy or wait too long to get in. A slight slowdown in earnings growth could be the only pullback we have. It’s becoming increasingly clear that the new and improved Walmart is built to thrive in any economic environment. Investors aren’t likely to let this stock fall much before they start buying it again. It’s just a very promising stock.