Walmart Earnings: Digital Growth Anchors Margins Amid Stretched Consumers

Key Morningstar Metrics for Walmart

• Fair Value Estimate
  : $70.00
• Morningstar Rating
  : ★
• Morningstar Economic Moat Rating
  : Wide
• Morningstar Uncertainty Rating
  : Medium

What We Thought of Walmart’s Earnings

Walmart’s WMT first-quarter results included 7.3% net sales growth and adjusted EPS of $0.66 (up 8.1%). Adjusted operating income grew 5%, navigating an incremental $175 million fuel cost hit, while global e-commerce and advertising revenue surged 26% and 37%, respectively.

Why it matters: As the consumer begins to feel more stretched amid macroeconomic pressures, we believe Walmart US’ six-quarter-high traffic growth (3%) indicates that the firm’s value proposition continues to resonate deeply as inflation-weary households seek relief and consolidate shopping trips.

• High-margin streams like Walmart Connect (up 36%) and membership fees (up 17%) are reshaping the profit mix. Together with marketplace growth, these alternatives accounted for roughly one-third of operating income, and we forecast they will reach nearly 40% by decade’s end.
• We are encouraged by the 20-basis-point expansion in gross margin to 25.1%, which was aided by general merchandise share gains. However, we anticipate mix pressure will return as the fading positive impact of tax refunds shifts spending back toward lower-margin grocery and essentials.

The bottom line: We are raising our fair value estimate for wide-moat Walmart to $70 per share from $62, primarily reflecting a lower cost of capital estimate under our updated framework. Shares fell about 7% on May 21 but remain overvalued at 70% above our fair value estimate.

• We lowered our weighted average cost of capital estimate to 7.0% from 7.3%. The change does not reflect a new view of Walmart’s business, but rather, a more refined expression of our existing risk assessment.
• Even after the selloff, we posit that the market is pricing in an operating margin expansion to levels above historical peaks of 6% through outsize gains in advertising and memberships and a significant rebound in discretionary mix, which we view as unlikely amid intense competition.