Walmart’s cheap items justify its expensive inventory

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It is a rare retailer whose shares trade at a premium to Apple, Microsoft and Alphabet. But there are grocers, and then there’s Walmart.

Operationally, the 800lb gorilla of US retail is in a class of its own. While others have struggled to entice inflation-weary consumers to open their wallets, comparable sales at Walmart US grew 5.3 percent during the third quarter. That practically dwarfed expectations for a 3.7 percent increase, which is no small feat given Walmart’s size. Last year it brought in $648 billion in revenue. To add to the flexibility, Walmart increased its full-year guidance for the second time this year.

True, the stock itself is no bargain after climbing nearly 64 percent this year. It trades at a forward price-to-earnings ratio of 33. That beats not only direct rival Target, but also Google parent Alphabet, Facebook owner Meta Platforms and smartphone supremo Apple, according to LSEG.

But this prize is deserved. Walmart has navigated the challenges of a tepid economy and inflation with aplomb by attracting higher-income customers and growing alternative revenue streams. It continued to take market share from competitors in both grocery and general merchandise in the third quarter. Higher-income households, earning $100,000 a year or more, accounted for about three-quarters of stock gains during that period, the company said.

Operating profit is also growing faster than sales thanks to its array of higher-margin businesses. These include a third-party online marketplace, digital advertising and an Amazon Prime-like membership scheme called Walmart Plus. All of these are fast growing and more profitable. This has allowed Walmart to keep prices low on food — and even cut them — to drive traffic and put pressure on competitors. Few other brick-and-mortar retailers can claim to be able to do the same. Tighter inventory management also contributed to the increase in gross margins in the quarter.

A strong dollar and proposed tariff plans floated by President-elect Donald Trump are some of the potential issues that could hurt Walmart. About a fifth of its sales come from outside the US, and the dollar’s rise this year could reduce the value of its non-dollar earnings overseas.

But these should be more than manageable. Walmart’s size and diversified business model mean it has managed nearly a decade of uninterrupted like-for-like sales growth. It may not be growing as fast as tech, but its prospects aren’t dependent on having to invent entirely new business models — and there are fewer regulators itching to break it up. Its shares are unlikely to find themselves in the clearance aisle anytime soon.

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