Don’t Chase Walmart Higher, Wait For Extra Low Prices

Key Points

• Walmart shares are up on a better-than-expected report. 
• Inventory growth slowed as well but inventories continue to rise. 
• Guidance is favorable but strength may already be priced into this market. 

Walmart’s (NYSE: WMT) Q3 results are good but they are no reason to start chasing the stock higher. The market is moving up on relief as much as anything else and the risks for the company remain. As with Home Depot (NYSE: HD), the Q3 period is strong but inflation remains an overshadowing issue and the inventory is still on the rise. Yes, inventory growth slowed on a YOY basis but it is still growing and at very high levels that are driving inventory-reducing actions. This is important because the busiest shopping season of the year is about to unfold and the outlook for holiday spending isn’t awesome. 

Deloitte forecast 7% to 9% holiday spending growth for 2022 but this is all inflation as the majority of consumers say they will cut down on the volume of gifts. This is down from a robust 14.1% in 2021 and the window of opportunity has shrunk. The survey suggests consumers will visit fewer merchants, both B&M and digital, thereby filling the wishlists almost a week quicker than last year. The takeaway is that Walmart and the retail sector are not out of the woods and the share price, which is approaching a major resistance level, will probably pull back to regroup well before the Q4 reporting season comes to pass. 

Walmart Has Strong Quarter, Guides Higher

Walmart had a strong quarter in Q3 and was able to guide higher. The company reported $152.8 billion in revenue which is good for a gain of 8.8% over last year. This is more than 400 bps better than expected and driven by a 6% increase in ticket average. The number of tickets grew at a slower 2.1% pace with US comps up 8.2% and ahead of the Marketbeat.com consensus. eCommerce and Sam’s Club both played a significant role with eCommerce growth accelerating to 16% YOY and Sam’s Club slowing to 10% YOY. Digging a little deeper into Sam’s Club numbers, the member growth slowed to 8% which suggests growth at the store may slow further. If Costco (NYSE: COST) reports similar numbers it could help cap gains for the group including BJs Wholesale Club (NYSE: BJ). 

The company’s earnings were strong as well but the margin improvement was marginal. A slim decline in gross margin was offset by a slim increase in SG&A that left the operating income better than expected but up a slower 4.8% compared to the larger growth in revenue. On the bottom line, the $1.50 in adjusted EPS is great and beat by $0.18 but up an even smaller 3.4% YOY. The takeaway here is that cash flow is good, good enough to support the dividend and a new $20 billion share repurchase program, but not an awe-inspiring catalyst for share prices with the stock already trading at 23.5X its earnings. 

The guidance is the same, the company improved its guidance for revenue and earnings but earnings are still expected to contract versus the top-line 6.5% of organic growth. This news should help support prices in the near term but is not a reason for new highs until there is more clarity in the economy. And inventory growth? The company's inventory growth slowed to only 12.5% YOY compared to higher double-digits last quarter. Sam's Club inventory is up 35%, however, which is more bad news for the membership club group. 

Walmart Pops On Opioid News 

Another catalyst for Walmart’s post-earnings pop is an anticipated settlement over charges related to opioid distribution pertaining to the pharma industry. The company submitted a $3.1 billion proposal that has to be ratified by 43 states but is expected to pass. If so, it removes a cloud that has been hanging over the stock for many years. 

The chart of daily prices has the stock up more than 7.5% and possibly moving higher. The candle is long and green and is supported by the indicators so there is hope. The caveats are that resistance is just above the current levels at the $151 price point and it could be strong. Add in the fact that this move closes a large window that formed earlier in the year when inventory issues first came to light and the odds that resistance caps gains become very high. A move above $151 would be bullish but even so, the next resistance point is just a few dollars higher at the all-time high which is only 7.5% above the current price action.