Breakingviews: Walmart’s ho-hum is the new fabulous

At Walmart, boring is the new fabulous. The $390 billion retailing giant is a bellwether for consumer spending. So, it would follow that, as wallets become pinched, low growth and slim margins would be cause for concern. But Walmart benefits from being big, established, and, importantly, profitable, and the latter can’t be said for Amazon.com’s retail business. As the shine comes off of technology companies, Walmart’s failures are an afterthought.

The company led by Doug McMillon warned on Tuesday that a lack of visibility into its shoppers is causing Walmart to exercise caution. U.S sales for the same set of stores is expected to rise to 2.5% in the company’s fiscal year which ends in January, the high end of Walmart’s guidance, but below analysts’ expectations of 3%, according to Refinitiv. Profits meanwhile are getting crunched. Earnings per share for the year is expected to be at least 45 cents lower than what the Street is forecasting.

The problem is that the consumers are shifting their spending to groceries versus general merchandise, and food inflation is still stubborn. Walmart’s commitment to keeping prices low is reflected in its operating margins that currently hover at a slim 3%. To make up for operating statis, Walmart is casting about for new sales streams including advertising, which Cowen reckons could have a chunky margin of 30%. But any effects won’t kick in until after January 2024.

In isolation, that all seems bad. But in a beauty contest of retailers, Walmart looks decent. Amazon earlier this month reported an operating loss of $2.8 billion in its North America region last year. That is the e-commerce giant’s retail group, and it accounted for more than 60% of the top line sells.

Meantime while the brick-and-mortar colossus’s Prime-like membership has failed to get off the ground – it represents less than 1% of the top line – that’s less of an issue when technology companies have fallen out of favor. Walmart’s enterprise value to this year’s EBITDA, at 12 times, is a hair more than Amazon’s. The ho-hum is having its moment.