Walmart upgraded to buy as third-party sellers, advertising and improved fulfillment are winning customers

By Ciara Linnane

Retailer adds defense and offense on sales and profit, says JPMorgan

Walmart Inc.'s stock was close to recent record highs on Monday, as analysts weighing in on last week's annual shareholder meeting and associate event struck a mostly bullish tone and said they expect the retailer to win more market share in the second half.

The stock was up 0.9% at $66.51, after last Thursday hitting a record intraday high of $67.42.

JP Morgan analysts upgraded the stock to overweight, the equivalent of buy, from neutral, and said the stock "adds a strong balance of defense and offense on both the top and bottom lines in a soft (to softening) consumer backdrop with a highly uncertain 2H24 ahead."

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Analyst Christopher Horvers said estimates are "beatable," and that he expects Walmart (WMT) to see multi-year double-digit growth in per-share earnings as recent strategic moves pay off.

The analyst cited several topline tailwinds in the U.S., including a consumer that is highly value-oriented after a long period of inflation and the prospect for modest grocery reflation, or the return to recent inflation-driven price increases, while consumer-packaged goods companies and grocery brands seek to drive unit volumes, especially at Walmart.

The company should also benefit from general merchandise share gains on expanded third-party capabilities, and the low risk of trade-up to higher-priced items given the stress on consumers.

The company's alternative profit pool benefits, which include advertising, online third-party marketplace sales and fulfillment services, now account for about 80% of operating profit in the U.S., said Horvers, and segment margin is expected to reach 6% in three years.

"In the near-term, these can also fund price/service investments in the softer backdrop while other retailers may lack margin offsets," the analyst wrote in a note to clients.

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Investors are also underestimating an expected inflection in profitability in the company's international business, which is also expected to reach a 6% operating margin in three to five years.

Overall, Walmart's big opportunity lies in general merchandise, where it has a roughly 4% share compared with 20% for Amazon.com Inc. (AMZN) That's according to J.P. Morgan's just-released 12th annual Retail vs. Amazon report, said Horvers.

That low share "is where its assortment, delivery speed, and tech improvements offer the ability to reach beyond its core store markets and relatively lower income/grocery focused customer base," he wrote.

Walmart's marketplace now offers more than 420 million SKUs, or shop-keeping units, most of which are available within two days, while certain brands that wouldn't associate previously with the discounter are now available via third parties or direct-listing relationships. These include Apple Inc. (AAPL) and privately held appliance maker Dyson, which are opening the gates for others to follow, he said.

"Walmart also now has a single onboarding gate for marketplace sellers, allowing it to expand the reach of its domestic third-party assortment internationally without burdening sellers with additional administrative tasks," said the note.

The company has recently used GenAI to improve gaps in its online offering, search and supply-chain efficiencies, it said.

Oppenheimer analysts said Walmart remains a top pick as they raised their stock price target to $75 from $69. Analysts Rupesh Parikh and Erica Eller have an outperform rating on the stock.

"Overall from our time with management, we remain confident in the company's ability to sustain top and bottom line momentum. This includes a line of sight in achieving profitability for the US e-commerce segment," they wrote in a note to clients.

D.A. Davidson, which has a buy rating on the stock, agreed that Walmart is poised to keep winning.

"In particular, Walmart is doing better and taking share of wallet from higher income customers," analysts Michael Baker and Keegan Cox wrote in a note to clients.

The company's overall offering "is resonating more than in the past with this cohort due to the company's ability to elevate their convenience offering, product offering, and customer experience both in store and online, which likely play an increased role in higher income customer's value equation," they wrote.

The stock has gained 23% in the year to date, outperforming the S&P 500 SPX, which has gained 12%.

-Ciara Linnane

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06-10-24 1228ET

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