We Break Down Walmart's Latest Results and When We Would Buy This Dip

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Walmart (WMT) reported stronger-than-expected third quarter results Tuesday morning. Total revenues increased 4.3% YoY to $140.5 billion, topping estimates of $135.43 billion. On the bottom line, adjusted diluted earnings per share increased 8.2% YoY to $1.45, beating estimates of $1.40.

By operating segment, Walmart U.S. posted a good result with net sales increasing 9.3% YoY to $96.6 billion, beating estimates of $94.754 billion. Market share gains in the grocery business was an important driver of the better than expected sales results. Food sales increased $3.6 billion during the quarter, representing the strongest quarterly growth rate in six quarters.

How is Walmart regaining share from its competitors? Walmart's leadership in price and omnichannel offerings continues to find broad appeal with its customers.

The positives

U.S. comparable sales outperformed, increasing 9.2% in the quarter (or 15.6% on a two-year stack) against expectations closer to 6.4% thanks to strong underlying trends led by in-store traffic. Stimulus payments and inflation had a positive effect on comps as well. 

E-commerce net sales were also very strong, increasing 8% YoY or a massive 87% on a two-year stack. Walmart's e-commerce marketplace went through a significant expansion in the third quarter, adding roughly 21 million items and increasing the number of items available for expedited delivery. Advertising sales from Walmart Connect, a small but high margin revenue stream, grew nearly 240% on a two year stack.

Walmart US ended the quarter with inventory up 11.5% YoY. This is very important because it shows that the holiday season quarter will not be constrained by supply chain issues/port congestion. Walmart's size and scale are the envy of retail. And we have every reason to believe Walmart will be a go-to destination during the holidays. The retailers just had a strong back-to-school season, the momentum continued for Halloween, and management said on the call that they are "pleased" with their position into Thanksgiving. 

The negatives

While all the above was great news, there was some downside in the print that we believe the market is keying off. The gross profit rate at Walmart U.S. declined 12 basis points, reflecting something you could guess... increased costs in the supply chain. While lower markdowns and increased contributions from Walmart Connect have helped offset cost pressures, Walmart was not immune to inflationary cost pressures in some parts of their business. But unlike other retailers who simply take no issue passing on higher costs to their customers, Walmart prides itself on offering the lowest prices possible. If the market faults them for this, so be it. "Fighting inflation is in our DNA," as CEO Doug McMillon said on today's earnings call.

International & Sam's Club

Net sales from Walmart International declined 20% YoY or $5.9 billion to $23.6 billion, but keep in mind that this was largely due to $9.4 billion in divestitures. More importantly, comparable sales were strong in each of Walmart International's reported regions, with comps increasing 7.2% at Walmex, surging 16.5% in China, and growing 6% in Canada. The company also cited strong momentum in e-commerce sales, which grew 33% on top of last year's strong gains and have nearly doubled over the past two years. 

And at Sam's Club, net sales increased 19.7% YoY to $19.0 billion as comparable sales grew 19.8%, driven by double-digit transaction, solid ticket growth, and a benefit from stimulus spending and inflation. Membership income increased 11.3 % YoY thanks to a record total member count and improved renewal rates. On a with fuel basis, the gross profit rate fell 127 basis points YoY due to fuel related headwinds, higher supply chain expenses, cost inflation and higher fresh waste, partially offset by lower shrink.

Mixed guidance

Turning to the guide, management sees fourth-quarter Walmart U.S. comps sales increasing 5% excluding fuel. For fiscal year 2022, management expects Walmart U.S. comp sales above 6% excluding fuel. On adjusted eps, management raised its full-year outlook to around $6.40 versus prior guidance of $6.20 to $6.35 and the $6.34 consensus. It's great to see Walmart beat expectations and raise guidance for the third quarter in a row, however management's' updated forecast implies the fourth quarter eps guide at $1.48. This is only in-line with expectations and may be another explanation for the weakness in trading today.

On Capex, management now expects around $13 billion to be spent in the fiscal year, down from the previous view of around $14 billion. This change is largely due to timing, as management now anticipates some of its originally planned investments will push into next year. As a reminder, Walmart has been investing heavily this year in its supply chain, technology, automation, and people under the belief that they will see an acceleration in top-line and profit growth in the mid-to-long term. While we can't fault management for its reinvestment in the business and the drive to keep prices as low as possible to the benefit of the consumer, we can't help but think that there is a cohort of investors who wish to see more profits flow back to shareholders. To this point, Walmart only bought back $2.2 billion worth of stock in the third quarter despite having $13.1 billion remaining under its current authorization and a stock that has done very little over the past year.

Here we go again. Despite topping both sales and earnings expectations in the quarter and raising guidance for the third time this year, shares of Walmart are sinking on its earnings day.

We can't really say we are surprised by the move. In our note last Wednesday, we pointed out that Walmart has a history of being faded on its earnings releases, even as the majority of those prints were better than expected. We said it was hard to fight this pattern and recommended trimming shares if you did not already follow along with our October 26th sale at around $149 per share.

Bottom line

How are we thinking about our position in light of today's pullback? Look, Walmart's commitment to everyday low prices for hardworking Americans isn't going away. Sure, this may temporarily hurt margins, but it is the model the company was built on and it has been a winning strategy for decades. If the market keeps putting Walmart on sale and the stock falls below our average cost basis of $142.51, we will look to step in and buy back the stock we sold higher.

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 (Jim Cramer's Charitable Trust is long WMT.)

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