The retailer looks fairly valued as it posts its eighth consecutive quarter of same-store sales growth.
Erin Lash, CFA
12:52 PM | Email Article
Our $75 per share fair value estimate for wide-moat Wal-Mart
remains intact after digesting second-quarter results that included 2.8% organic sales growth. In the U.S., comparable-store sales increased 1.6%, reflecting higher traffic (up 1.2%) and increased average ticket (up 0.4%), marking the eighth consecutive quarter of positive same-store sales growth and the seventh consecutive quarter of positive traffic for Wal-Mart U.S. This performance was even more impressive, given it came despite food price deflation, which negatively impacted comps to the tune of 100 basis points. As a result, we maintain our stance that even in a highly competitive environment, the Wal-Mart banner still has power to drive traffic.
Erin Lash, CFA, is a director of consumer sector equity research for Morningstar.
Beyond its home turf, Wal-Mart’s international business chalked up 2.2% underlying sales growth, with the firm posting positive comps in Mexico, Canada, and Brazil. However, the U.K. continues to struggle at the hand of intense price competition--pressure that we don’t expect to abate in the near term. In the aggregate, we forecast Wal-Mart to generate 3%-4% sales growth outside the U.S. over our 10-year explicit forecast.
Due to continued investments in higher wages and e-commerce, adjusted operating income edged down 30 basis points to 4.7%. But despite the near-term hit to profitability, we think that this spending is prudent, particularly given the threats Wal-Mart faces from competitors (namely Amazon) that are also investing aggressively.
Management bumped up its full-year earnings per share guidance to $4.15-$4.35 (from $4.00-$4.30), but our outlook ($4.18) is still within the company’s revised range. Over the longer term, we believe Wal-Mart’s cost edge will enable it to leverage 2% total sales growth to sustain 5% operating margins (versus a 5.8% 10-year historical average) once its investments moderate over the next few years. Shares trade in line with our valuation, though, and we’d suggest investors await a more attractive entry point.
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