Walmart shares recently reached a 52-week high of $162.78, only to fall fast on Aug. 17 after the retailer reported fiscal second-quarter earnings. Some analysts cheered the second-quarter results, while others see Walmart shares as overpriced.
The retail sector is also under pressure from higher interest rates and concerns about the potential for reduced consumer spending.
On Aug. 17, Walmart stock lost more than $5 per share during the opening and closing on earnings day. Shares have since moved toward the $160 range as analysts reiterate “buy” recommendations and raise the share’s overall price target to $185, an indication the Bentonville-based retailer is in a good position should the economy continue to slow.
Ben Bienvenu, an analyst with Stephens Inc., said Walmart is carrying momentum into the back half of the year and continues to have a multitude of investments that are yielding solid returns and enhancing margins for the business.
“Market share gains continue for the company, and management is focused on leveraging that bigger base of sales into an inflection to higher returns on invested capital, which is a message we’ve not heard from Walmart in years and speaks to the transformation that has taken place in the business over the last eight years,” Bienvenu noted on Aug. 18.
He noted gains in Walmart’s U.S. segment led by grocery and consumables that captured market share gains and recorded comp sales growth in high-single digits from a year ago. At the same time, inventory was down 7.6%, helping to bolster the overall gross margin. He said Sam’s Club and the international business also outperformed expectations.
Morningstar analysts also applauded Walmart’s overall second-quarter performance but believe the stock is fairly valued at $145 per share, given its earnings guidance of $6.36 to $6.46 per share for the fiscal year.
“Given Walmart’s dominant position in high-frequency categories such as grocery, we believe the retailer is well positioned to navigate an uncertain economic environment,” Morningstar noted on Aug. 18.
At Monday’s closing price of $157.51, Walmart shares (NYSE: WMT) had a price-to-earnings (PE) ratio of 30.33%, making it expensive among conservative investors who follow PE ratios for the retail sector that tends to average below 20%. Despite the high PE, seven analysts, including Bienvenu, still rate the shares a “buy.” Eight analysts remain “neutral” on Walmart shares.
Marko Kolanovic, head of research at J.P. Morgan Chase, noted Monday (Aug. 21) that consumers are under pressure and that spells trouble for retailers.
“Our estimate of excess savings for US households when adjusting for inflation is now fully exhausted from 2021 high of $2.1 trillion, with the risk of widening imbalance if outlays accelerate. And while there are still elevated levels of household liquidity across cash assets, estimated at $1.4 trillion when adjusted for inflation, that, too, is at risk of getting fully depleted by May of 2024,” Kolanovic noted.
Retail sales in the second quarter were flat against the first quarter despite 2.4% GDP growth, according to the U.S. Bureau of Labor Statistics.
“With the personal savings rate hitting rock-bottom, excess savings largely exhausted and some cracks appearing in the jobs market recently, I am heavily underweighting the retail sector as more pain looks like it is ahead for those businesses,” noted Bret Jenson, strategist for TheStreet Real Money.