The shares of retailing giant Walmart (WMT) are under pressure this morning, despite releasing the financial details of what was a better than expected fourth quarter.
The guidance? The guidance, for both the current quarter and the full year 2023 is on the light side. Hence, a stock that closed on Friday trading at 24 times forward looking earnings became expensive in the blink of an eye.
For the three month period ended January 31st, Walmart posted an adjusted EPS of $1.71 (GAAP EPS: $2.32) on revenue of $164.048B. Both the adjusted earnings number and the revenue print easily beat Wall Street's consensus view, as that top line print expanded by 7.3% year over year. The adjustments made were the result of $1.16 per share worth of unreleased gains on investments made partially offset by $0.55 per share worth of reorganization and restructuring costs.
Walmart's comp sales increased 8.3%, beating expectations, and 13.9% on a two year stack. E-commerce sales grew 17% and 18% on a two year stack. Sam's Club comp sales increased 12.2% and 22.6% on a two year stack, as membership income increased 7.1%. Member count ended the quarter at an all-time high.
Walmart International net sales increased 2.1% or in constant currency, 5.5%. China and Canada led international growth. Globally, advertising grew 20%, led by 41% growth at Walmart Connect in the US.
Cost of sales increased 8.6% to $125.423B, dropping gross margin to 23.5% from 24.4% for the year ago comp. Operating expenses increased 5.1% to $33.064B, producing operating income of $5.561B, which was a decrease of 5.5%. After factoring back in the $3.848B worth of investment gains that were adjusted for on an EPS basis, net income attributable to Walmart shareholders increased 76.2% to $6.275B.
Walmart US generated net sales of $113.7B (+8%). As mentioned above, comp sales ex-fuel increased 8.3%, as transactions increased 1.8% and the average ticket increased 6.3%. There was an e-commerce contribution of about 140 basis points. This resulted in operating income of $5.4B (+3.8%).
Walmart International generated net sales of $27.6B (+2.1%). As mentioned above comp sales in constant currency increased 5.5%. This resulted in operating income of $0.3B (-65.3%) or $0.2B (-72.1%) in constant currency. Adjusted operating income in constant currency came to $1.1B (+16.9%).
Sam's Club generated net sales of $21.4B (+11.3%). As mentioned above comp sales ex-fuel increased 12.2%, as transactions increased 6.7% and the average ticket increased 5.2%. There was an e-commerce contribution of about 120 basis points. This resulted in operating income of $0.5B (-6.2%).
For the current quarter, the firm sees consolidated net sales increasing 4.5% to 5% in constant currency, and consolidated operating income that grows 3.5% to 4% in constant currency after a negative LIFO impact of 235 basis points. In the company's view, this puts adjusted EPS at $1.25 to $1.30, excluding a negative $0.03 impact from LIFO. This is a bit on the light side as Wall Street was looking for something closer to $1.36.
For the full year 2023, Walmart sees consolidated net sales growing 2.5% to 3% in constant currency. Broken out by segment, the firm sees 2% to 2.5% growth ex-fuel in the US, roughly 6% growth internationally in constant currency, and about 5% growth at Sam's Club ex-fuel. The firm sees operating expenses increasing slightly as a percentage of net sales in constant currency, allowing for roughly 3% growth in consolidated operating income, after factoring in a negative 100 basis point impact from LIFO.
This all would put full year adjusted EPS at $5.90 to $6.05, which includes a $0.14 hit from LIFO inventory management. Wall Street was looking for $6.08 on this metric.
For the quarter, Walmart generated $29.101B in operating cash flow. The firm spent $16.857B on property and equipment. This left Walmart with a free cash flow of $12.2B (+$1.2B from the year ago comp). Out of this, and then some, came $6.1B worth of dividend payments and share repurchases of $9.9B. You read that right. Free cash flow was massive. Yet, returns to shareholders came to 131% of free cash flow. In addition the firm added a one penny increase to the quarterly dividend, from $0.56 to $0.57. The next payment goes out on April 3rd to shareholders of record March 17th.
Turning to the balance sheet, Walmart ended the quarter with a cash position of $8.885B, inventories of $56.576B and current assets of $75.915. While cash and current assets in the aggregate are both down a rough $6B from 12 months ago, inventories are flat over the past year, and that is a positive. Current liabilities add up to $92.458B. This is an increase from last year and includes $4.563B in debt coming due in less than a year. All of this leaves the firm's current ratio at 0.82, which is sub-optimal. What's worse is that this ratio is down from 0.93 a year ago.
Total assets amount to $243.457B. This includes $28.174B worth of "goodwill". At 11% of total assets I do not have a problem with this. I do not see any other intangibles entered. Total liabilities less equity comes to $159.7B. This includes total debt of $34.649B, which encompasses the shorter-term debt mentioned above.
Obviously, this balance sheet is not yet in the shape that I would like to see it in. I would like to see a better balance between cash and debt-load, especially while inventory management continues to be a drag on performance. I love the sizable free cash flow. I don't love having to go beyond free cash flow in returns to shareholders. I question the wisdom in increasing the dividend unless share repurchases are curtailed. The firm leaves $19.3B on its $20B authorization that was just approved this past November.
I only see one sell-side opinion that has been released since these earnings were released this morning. Justin Kleber of Robert W. Baird, who is rated at four stars by TipRanks, reiterated his "Buy" rating on WMT as well as his $165 target price.
I like the quarter. What's not to like? The firm beat Wall Street on both the top and bottom lines. Guidance seems cautious, which is probably prudent. The firm remains a free cash flow beast. Does that earn WMT a 24 times forward looking earnings valuation? Not if that free cash flow is not out toward correcting the firm's weak spots. That balance sheet is a weak spot.
I like Walmart, especially in a softer economic environment. I just don't like it here.
Readers can see that the rally that began with the May lows, broke through the lower trendline of our Pitchfork model in mid-January. This has produced the base illustrated below...
With the stock backing away from the higher end of this base this morning, I would look for support around $138 to be tested later this week as the last sale pulls the 21 day EMA (exponential moving average) away from almost crossing over the 50 day SMA (simple moving average) and toward the 200 day SMA. Should the stock find buyers in the $140's, due to the dividend raise, then this effort is moot.
I just do not see myself initiating a name at an elevated valuation, with a sloppy balance sheet, while it chooses to return more than what is enough free cash flow to get a lot done, to shareholders. I think that should the lower bound of this range fail, this stock could return to the $120's at some point around mid-year.
Depending on where this stock opens and trades after that, it looks to me like June 16th $125 WMT puts can be sold for more than $1.70. Selling this premium might have a better probability for a positive return at this time (opinion) than would a long position in the equity. I could be wrong.
In that case, I still win the consolation prize (the premium). Cautious traders could purchase a like amount of June 16th WMT $110 puts for probably more than a dollar less than the above sale. Just as a means of averting a complete disaster if Walmart should have one.