Walmart is Up 56% YTD, Is it Still a Top Consumer Staples Stock?

Key Points

• Retail powerhouse Walmart is having a great showing so far in 2024.
• The company has consistently taken grocery market share over the past few years.
• Its ability to move into non-traditional markets for companies in its industry is another big strength. 

It's been a good year in the stock market so far; however, one group of companies that hasn’t performed as well as others are those in the consumer staples sector. This includes companies making and selling essential products like food. The Consumer Staples Select Sector SPDR Fund NYSEARCA: XLP has provided a total return of only around 15% this year, while the S&P 500 is nearly at the 23% mark.

However, some consumer staples stocks have massively outperformed the market this year. That includes the retail giant Walmart NYSE: WMT. It’s the largest company in its sector, with a market capitalization of around $660 billion. So, is Walmart a set-it-and-forget-it investment that will make investors happy for years to come, or is the stock running out of steam after its massive uptick this year?

Walmart: Winning the War in Groceries

Walmart is an omni-channel company. It sells to customers via its retail stores and its e-commerce site. Its U.S. segment made up around 68% of total revenue, while its international and Sam's Club segments accounted for 18% and 14% respectively. I’ll use the company's U.S. segment as a proxy for the overall business to understand how it breaks down revenue by product type. It doesn't report revenue by product type consistently across segments. Groceries made up 60% of U.S. revenues, general merchandise made up 26%, and health and wellness made up 12%. Its “other categories” made up the rest.

This breakdown is similar to Costco NASDAQ: COST, where 54% of revenue came from food, and 25% from "non-food." Where Walmart has been winning is in taking grocery market share from its competition. The company increased its overall grocery market share by 1.5%, up to 23.6%, from 2021 to 2023. And it is doing so not only on an overall basis but also when it comes to online grocery sales. This isn’t overly surprising, given the rapid increase in inflation that has hit food particularly hard over the past few years.

Since Sept. 2021, grocery prices have increased over 17%. This outpaces the 15% when looking at all items. Due to this, as well as overall low consumer sentiment post-pandemic, consumers are becoming more scrupulous about how they spend money. This benefits firms like Walmart greatly. The massive scale of the company allows it to keep its prices lower compared to the competition, driving consumers prioritizing savings to the company. The nearly 10% increase in online grocery sales market share from Q2 2021 to last quarter is evidence of this.

Walmart Can Sustain Advantage Through Value and Innovation

One reason I continue to like Walmart going forward is due to the cost savings it can continue to offer customers. Despite positive economic indicators, consumers still have sustained a much less positive view of the economy. These indicators include historically low unemployment, a strongly rising stock market, the Fed beginning to drop rates and slowing inflation.

In my view, this is negative sentiment largely due to the already embedded inflation in the economy that resulted after the pandemic. Consumers don’t notice the fact that prices are increasing slower than they were the month before; they notice that they are paying 17% more for groceries than they used to. Until customers actually start to feel wealthier, they likely won’t move to stores with higher-quality goods at a higher price.

Walmart also differentiates itself through its willingness to enter different markets. When it comes to consumer staples companies, innovating the business often isn’t the name of the game, but that’s not so at Walmart. The company is expanding into many different areas to grow its business. The growth of its e-commerce business allows it to sell ad space, a much higher-margin business than groceries. It is also venturing into the third-party marketplace arena. This allows the company to earn commissions on products other parties sell and get more data on what customers are buying.

Walmart Remains a Top Pick

As with many companies leading their industries, Wall Street analysts' price targets have continued rising at Walmart as the company’s stock price rises. I am a big believer in this firm that is continually offering customers great value, and also looks for ways to improve its business beyond the standard strategies of many retail consumer staples companies. It’s one of my favorite names in this sector long-term.