Is it time to buy the dip in Walmart shares?

Key Points

• Walmart falls on soft guidance but sets up for another run at new all-time highs. 
• The world's largest retailer is outperforming its major competition and guiding for growth. 
• Target continues to lose share to Walmart and will struggle with growth in 2024. 

Investors looking at Target’s NYSE: TGT 17% post-earnings gain and Walmart’s NYSE: WMT 7% decline will want to consider the causes of the moves before choosing one retail stock over the other. While Target reported a better-than-expected quarter and gave a favorable outlook for margin, this company is shrinking while Walmart is growing. 

The main takeaway from the reports is that Target continues to struggle in the current environment, losing share to off-price retail and Walmart, while Walmart is gaining share in key categories. More importantly, Target expects its business to continue shrinking in 2024 while Walmart is guiding for growth. 

Walmart beats but gives cautious guidance for the holiday quarter

Walmart had a solid quarter with revenue of $160.8 billion, up 5.2% compared to last year and 150 basis points better than expected. This blows Target out of the water with its 4.2% decline and weak comps in the store and digitally originated transactions. 

Walmart comps grew 4.9% in the US and were bolstered by international and Sam’s Club Business strength. US comps are up on a combined effect of +3.4% transactions and a 1.5% ticket average, with eCommerce adding about 300 bps to the total. The company says it had solid growth across segments, led by a 24% gain in eCommerce globally and market share gains. 

The margin news is also good. The company reported a 32 bps improvement in gross profit and a 182 bps decline in operating expenses, which drove gains on the bottom line. The bad news in the Q3 results is that margins did not improve as much as expected, resulting in a mere 2% increase in adjusted earnings. 

However, the takeaway is that operational improvements and 1-offs in the prior year resulted in a 20% increase in operating cash and free cash flow without the aid of inventory reduction. Walmart’s inventory is down 1.2% compared to last year; Target’s outsized bottom-line strength is largely due to a 14% YOY decline in inventory. 

Guidance weighs on Walmart shares

Walmart raised its guidance due to the Q3 strength and expected momentum but missed the consensus estimates by a slim margin. That is helping to drive the stock lower in early pre-market action immediately following the release, but there is a bigger takeaway than a relatively weak outlook. Walmart’s guidance calls for mid-single-digit growth in 2024 with margin expansion compared to Target’s expectation for a low single-digit decline. Target may outperform its guidance but will have difficulty regaining ground lost to its competitors. Meanwhile, Walmart is likelier to gain a share in critical categories than lose it. 

Analysts may weigh on Walmart's share prices in the near term. The analyst's community rates the stock a Moderate Buy with a favorable and upwardly trending price target but may begin to reign in those targets now that guidance for 2024 is issued. Until then, Walmart is a Top Rated and Most Upgraded stock with about 10% upside compared to the post-release price action. Because the consensus has the stock trading at a new all-time high, it is a significant target. If the market moves to a new high, it will likely create additional momentum that takes it above the consensus target. 

The technical outlook: Walmart pulls back to the buy-zone

Shares of Walmart are down more than 5% in premarket action but the move is not alarming for bulls yet. The pullback is finding support above a critical level that may produce a bound and rebound as early as now. In this scenario, the market will continue consolidating near current levels before making its next move. 

If not, Walmart shares could fall another 4% or more to retest support at the $155 level. The dividend, safe and growing, and share repurchases will aid market support over the next weeks and quarter. The company returned nearly $6 billion to shareholders in the year's first nine months.