Walmart Lights Up the Market: Record Growth Amidst Challenges

Earlier this month, Nvidia was added to the Dow Jones Industrial Average. This stock has nearly tripled in value this year, making it the best-performing Dow component in 2024. However, for Dow stocks that have been in the index longer than just a few weeks, Walmart (NYSE: WMT) takes the top spot as the best performer year-to-date, boasting a remarkable 72.1% gain compared to a mere 17.5% rise for the index overall.

What’s fueling Walmart’s tremendous performance this year, and is its dividend stock still a worthwhile investment at an all-time high?

Image source: Getty Images.

Examining Walmart’s Growth Journey

The chart below illustrates Walmart’s performance over the last 20 years.

WMT Revenue (TTM) data by YCharts

In the late 2000s, Walmart experienced solid revenue growth and maintained operating margins of 5.5% to 6%. From 2010 to 2015, growth slowed and margins dipped slightly.

From 2015 to 2020, Walmart faced challenges adjusting to the rise of Amazon and increased competition from wholesale retailers like Costco Wholesale, which directly impacted Walmart-owned Sam’s Club. The COVID-19 pandemic further disrupted the retail sector, forcing Walmart to adapt rapidly, leading to innovative strategies it has continued to develop.

The chart reveals that Walmart’s sales increased during the early pandemic, stalled due to supply chain disruptions and inflation, but surged again over the past two years as margins have also improved.

Walmart’s remarkable results stand out in a market where many competitors are struggling. The primary driver of Walmart’s success has been the effectiveness of its long-term investments.

Walmart’s Innovative Business Strategy

On September 1, 2020, amid the pandemic, Walmart launched Walmart+, a contactless home delivery service that makes use of its numerous stores. This service has since become a key component of Walmart’s expanded customer offerings.

In the most recent quarter, revenue from Walmart+ grew at a double-digit rate, continuing a positive trend. Global e-commerce sales jumped 27%, boosted by store-based pickups, deliveries, and Walmart Marketplace—a platform that enables businesses to leverage Walmart’s supply chain and marketing services.

Walmart Connect, a service for sellers, provides various advertising solutions and performance insights. It has evolved recently, now offering sponsored searches, mobile ads, and more.

A noteworthy feature is Brand Shop, which allows businesses to create customized online storefronts that optimize search engine visibility. The ongoing enhancement of Walmart’s e-commerce capabilities and supportive tools for sellers is yielding significant results.

In the recent quarter, Walmart’s U.S. comparable sales rose by 5.3%, driven by a 3.1% increase in transaction numbers and a 2.1% rise in average transaction size. Notably, e-commerce alone contributed 290 basis points—over half of the comparable sales growth.

For the full fiscal year ending January 31, Walmart projects a sales increase of 4.8% to 5.1%, adjusted operating income growth of 8.5% to 9.1%, and adjusted earnings per share (EPS) between $2.42 and $2.47, reflecting a 10.1% year-over-year increase at the midpoint. Capital expenditures (capex) are expected to range from 3% to 3.5% of net sales, totaling around $21.9 billion.

Walmart’s strong results could have been even better if the company were not investing so heavily in capex. Five years ago, Walmart’s capex was only 2% of its revenue. Although revenue has grown by 28.6% in the last year, capex has surged by 111%.

Furthermore, Walmart repurchased $3 billion in stock this fiscal year—a modest buyback for a company its size. This strategy indicates Walmart’s preference for investing in long-term growth rather than simply repurchasing shares.

Apart from digital and e-commerce investments, Walmart is also focusing on new stores and remodeling existing ones to enhance customer experiences and advertising options. The company is even using generative artificial intelligence to refine product categories and improve its supply chain processes.

During the earnings call, CEO Doug McMillon addressed an analyst query regarding wages and pricing, describing Walmart’s capital allocation approach as “appropriately aggressive.”

We believe we are investing the right amounts, obviously, but it is a fluid situation. We monitor price gaps and employment market trends to make informed investment choices. I think we are being appropriately aggressive in our strategy, both on the income statement and in capital investments. Our substantial decisions in recent years, like investing in supply chain automation, represent our aggressive stance. We aim to grow profits faster than sales while navigating these investments.

McMillon’s confident remarks reflect Walmart’s belief in maintaining competitiveness on pricing and wages while consistently achieving higher operating margins.

Walmart’s Transformation into a Growth Stock

Despite the positive developments, Walmart’s stock does face some challenges. The first is its dividend yield. Walmart is considered a Dividend King, having increased its dividends for over 50 consecutive years. However, many of these increases were minimal until recently. As a result, the rising stock price has pushed the yield down to just 1%, lower than the S&P 500 average yield of 1.2%.

Another concern is the company’s valuation. Walmart’s price-to-earnings (P/E) ratio stands at 36.5. Even if the company meets the midpoint of its fiscal 2025 earnings guidance, the P/E ratio will still be around 36.2, which is not much better.

Historically, Walmart has traded at a premium valuation compared to the S&P 500, although current levels are unprecedented.