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Walmart is often seen as a bellwether for the US retail sector and consumer behaviours. Little wonder: the company, which generated $648bn in revenue last year, is the country’s biggest bricks-and-mortar retailer by sales.
Walmart’s strong second-quarter results and bumped-up full-year guidance last week suggest good times ahead for the company. But it is not necessarily the best proxy for the wider retail sector. What is good for Walmart is often bad for rivals. Investors who bid up shares of other retailers such as Target, Macy’s and Gap on the back of Walmart’s earnings may be setting themselves up for disappointment as more retailers prepare to report their results.
Walmart’s size and business mix make it unique among US retailers. For starters, it has a massive US grocery business, which generated 60 per cent of the revenue at Walmart US last year. Being a purveyor of cheap groceries has proved to be a sweet spot in the current climate.
While the rate of inflation in the US has eased, day-to-day life in America continues to be much more expensive than pre-pandemic. Food prices, for example, went up 25 per cent between 2019 and 2023, according to government data. They rose faster than housing, medical care, and all other major categories apart from transportation during this period.
This means even as American households are cutting back on everything from Big Macs and caramel frappuccinos to trips to Disneyland, bargain hunters are still packing the aisles of Walmart. More middle- and higher-income shoppers are doing their grocery runs there. At the same time, lower-income consumers are snapping up more of the company’s private-label food offerings.
Like-for-like sales at Walmart US climbed 4.2 per cent year on year during the second quarter. At Home Depot, the only other major US retailer to report results so far, they fell 3.6 per cent. The DIY retailer expects the metric to fall between 3 and 4 per cent for the year. Walmart raised its forecasts for full-year sales and adjusted operating income.
Selling groceries is a low-margin business. Walmart is able to keep prices low on food because of all the other side businesses it runs. Third-party online marketplace, digital advertising and Amazon Prime-like membership schemes — all these are fast growing and more profitable. Few other bricks-and-mortar retailers can claim to be able to do the same.
Walmart’s share price performance reflects this. The stock is up nearly 40 per cent so far this year and hit a new record high on Monday. At 29 times forward earnings, Walmart is also trading at a hefty premium to the broader retail sector. Do not expect the gap to close soon.
