Walmart: Stock of the Week

Why the grocery aisle may be the path to success for superstores.

Andrew Willis 25 March, 2024 | 4:39AM
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Key Takeaways for Walmart Stock:

  • Walmart (WMT)’s third-party marketplace may not be a strong contributor to the company’s growth in the online space, as we think Amazon can still beat the company on commissions, listing fees and fulfillment services.
  • Walmart continues to make meaningful progress in the online space through direct sales, with a significant increase in products available and investments in shipping. The company appears to be targeting consumers more broadly as well, with gas discounts and streaming service access.
  • Investors may want to keep an eye on Walmart’s grocery department, which has taken significant market share in the U.S., leverages the company’s core strengths in its large physical footprint, and helps defend against intense online competitors by getting customers in the door.

 

Andrew Willis: Have you ever bought something from a third-party seller at Walmart or Best Buy? How did your experience compare to purchasing from Amazon?

Was Walmart's third-party shipping as fast as Amazon's? And did you even get a good price? You might have gotten lucky, but for the most part – Amazon still seems to have everyone beat in the online space, especially with Prime. So where then is the growth potential for Walmart stock?...

Probably not online – at least in the near term. It hasn’t been for a lack of trying, with its own Prime equivalent, Walmart+ in the U.S., with 400 million products and major investments in distribution centres. They’ve even been sweetening the deal with fuel discounts a la Costco, and access to streaming services. But, alas, Walmart customers still tend to walk into the store to make their purchases.

Equity analyst Noah Rohr says overall e-commerce penetration and third-party marketplace relevance are still dwarfed by Amazon, and that Walmart is attempting to build out an ecosystem that puts the firm at the forefront of consumers’ lives. But the greatest opportunities for Walmart stock may not be trying to be all things at once, but rather building on what the company does really well.

A massive physical footprint, low prices and an increasingly cash-stapped consumer under the weight of interest rates hold the key here – and where it leads us appears to be the grocery aisle. Customers may not have the cash to meet Amazon Prime minimum orders for free shipping on non-grocery items, and the National Retail Federation estimates that less than 10% of grocery orders are conducted online.

Walmart is a More of a Grocery and Margins Play – But Still a Rare Amazon Contender

Today, Walmart commands a 25% market share in the grocery market in the U.S., with 90% of domestic locations, and many locations in Canada, now carrying grocery items. This avenue, coupled with margin improvements, could eventually drive profits that justify Walmart’s current stock price, which we see as a bit overvalued at the moment. That said, it’d be a different story if the company could dethrone Amazon – and to be fair, if anyone can give competitors a run for their money – we’d probably be talking about Walmart.

For Morningstar, I’m Andrew Willis.

 

bulls Walmart Bulls Say

  • Margin pressure should abate as Walmart’s recent investments in omnichannel fulfillment and its third-party marketplace continue to scale.
  • Walmart’s vast grocery offering insulates the firm from digital competition, given the perishability of the merchandise.
  • Walmart’s recent investments in supply chain automation should drive margin expansion. The firm may also reinvest the cost savings to hold down prices and drive foot traffic to its stores–a benefit relative to many smaller retailers.

bears Walmart Bears Say

  • Walmart’s third-party marketplace and third-party fulfilment capacity pale relative to Amazon’s scale. We posit Amazon can underprice Walmart on commissions, listing fees, and fulfillment services related to its marketplace.
  • Sam’s Club has woefully underperformed Costco in recent years, and the brand does not provide a compelling value proposition that would allow Sam’s to take share.
  • Walmart’s sales mix of higher margin general merchandise categories stands to decline due to strong digital penetration, prompting long-term margin degradation.

 

The author or authors do not own shares in any securities mentioned in this article.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Amazon.com Inc174.63 USD-2.56Rating
Walmart Inc59.53 USD0.46Rating

About Author

Andrew Willis

Andrew Willis  is Senior Editor at Morningstar Canada. He previously produced content for Fidelity Investments and finance industry events for Euromoney Institutional Investor and has written in the past for Thomson Reuters and CNN. Follow him on Twitter @Andrew_M_Willis.

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