Walmart's Q2 report
Walmart (WMT) fell 9% despite beating top and bottom line estimates for the second quarter and raising its full-year guidance. The stock traded near $99. Overall revenue grew 6%, strong for a company this size. Profitability and topline were both strong. Digital and alternative revenue streams grew fast. Walmart Plus, its paid loyalty program, is now a strong asset.
The miss came from comparable store sales (sales at stores open at least a year), which came in soft. Two causes: alternative revenue streams like the online marketplace and ads, which have been doing very well and feeding the topline, and problems in the pharmacy business tied to federal pricing. The pharmacy issues sound temporary. E-commerce held up and drove much of the growth. Walmart cited tariff refunds in its report as a boost to both current earnings and the full-year forecast.
The headline is the slowest sales growth in six years. Even so, holding a mid-single-digit growth path at this size is remarkable. The numbers were as strong or stronger than Target's (TGT) the day before. Target had a double beat and a nice day; it traded near flat this morning. Costco (COST) and Home Depot (HD) were both down a similar amount.
Why the stock dropped
The report was mixed, with things to like and things not to like. Walmart (WMT) has not performed particularly well this year. The stock was richly valued, so some holders are taking gains. My read: this is a temporary dip from profit-taking, with a rebound likely in a few weeks.
Walmart and Amazon arms race
The retail industry is an arms race between Walmart (WMT) and Amazon (AMZN). Together the two generate a trillion dollars in gross merchandise value - the total amount shoppers buy from them.
The consumer and the economy
The economy is still inflationary. Lower-income consumers feel heavy pressure and overall consumer confidence is low. In this setting, value retailers - Walmart (WMT), Costco (COST), Target (TGT) - tend to gain market share. They take it from high-end retailers as shoppers trade down, and from the low end as shoppers stretch their dollars. They also take share from traditional and regional grocers that lack the revenue to invest in innovation or cannot run their physical stores well.
DIY retailers are more challenged. Lowe's (LOW) numbers already showed this, and Home Depot's (HD) are not expected to be much stronger. Higher inflation hits the housing market, which decides whether people renovate or invest in their homes. BJ's (BJ) and Costco (COST) are still set to report; value mass merchants and club stores tend to do well in uncertain times.
At the company level, Walmart (WMT) is doing very well. As a signal about the economy, it points to a very uncertain next 12 months. A recession has been talked about for a long time, but the economy has resisted it so far. The story is consumers on a flight to value.
The options trade
For anyone who thinks Walmart's (WMT) numbers were good and the drop is just the valuation coming down to a more reasonable level, one approach is a cash-secured put. The trade: go out to September 4th, about two weeks out, and sell the $100 put. The put traded around 80 cents. If the stock stays above $100, you keep the credit. If it falls to the strike, you buy the stock at $99.20 - the $100 strike minus the 80-cent credit - a more favorable level on the chart.
Walmart's historical valuation runs about a 22 to 28 price-to-earnings ratio; it was over 40. As it comes down, it is still a good company making enormous revenue.
