Walmart Stock: Oversold Following First-Quarter Fumble

Shares of Walmart (WMT) plunged violently last week as the retail behemoth came short on earnings, helping drag down the rest of the retail industry with it. The stock is now down more than 22% from its highs and trailing the broader S&P 500 (SPY) after doing a decent job of holding its own in the earlier innings of the brutal sell-off.

Walmart may have better purchasing power than most other retailers. However, it could not dodge the blow of inflation in the first quarter, which took a toll on its margins. Such margin pressures ought to be viewed as temporary in nature, though. I remain bullish on WMT stock.

With the Fed poised to deliver front-loaded rate hikes (even if it’s at the expense of economic growth), inflation is bound to retreat at some point down the road.

Inflation Weighs on Walmart’s First Quarter

As a retailer with a reputation for being competitive on pricing, Walmart seems more than willing to insulate consumers from the worst of price increases. Still, inflation has reached a point where not even Walmart can go without hiking the price of some of its goods.

For the latest quarter, the company noted that the customer reaction to price increases had been quite mixed. Indeed, many consumers are still resisting the effects of inflation where they can. As a result, Walmart’s private-label brand saw a nice pick-up, as many consumers looked to trim away at their budgets.

So many retailers have seen their margins take a hit of late. Amid the unfavorable environment, Walmart has been able to maintain its competitive footing. If anything, the ability to maintain a leading value proposition over the likes of other retailers could lead to substantial market share gain over the coming year.

Undoubtedly, an inflationary environment with cooling economic growth is not good for anyone. However, the big retailers with the best value propositions may walk away as long-term winners as consumers look to stretch every dollar as far as it can go.

Walmart: Well-Equipped to Deal with the Tough Environment

Walmart’s first-quarter per-share earnings came in at $1.30, falling short of the analyst consensus of $1.48. Despite the miss, Walmart’s sales numbers were still solid, up just north of 2% year-over-year to $141.6 billion.

Though the bottom-line disappointment sent shivers down investors’ spines, it’s too early to conclude that consumer spending is about to fall off a cliff. Even if the U.S. economy were to tip into a recession or stagflation, Walmart is in far better shape than most other firms to hold its own.

If anything, tougher economic times and elevated levels of inflation could entice consumers to shop at Walmart over other big-box retailers that can no longer stay competitive on pricing.

As Warren Buffett stated at Berkshire Hathaway’s (BRK.A)(BRK.B) recent annual shareholders’ meeting, inflation is a phenomenon that “swindles almost everybody.”

Not even a robust, low-cost retailer like Walmart can dodge and weave past the jabs of high inflation. Still, compared to its peers, I’d argue Walmart is in better shape to be swindled to a lesser extent.

Undoubtedly, Walmart will have its hands full as it looks to better navigate through pandemic-induced supply-chain challenges while continuing to put up with prices rising across the board.

Over the years, the company has invested a considerable amount in various technologies and supply-chain initiatives that should help the firm improve operational efficiencies. In a recent investor presentation, Walmart noted that such investments should help accelerate growth over the longer run.

In the meantime, upward pressure on wages and subtle price increases could continue to weigh on the bottom line. However, it’s likely just a matter of time before such headwinds blow over and Walmart is left to take the share from other retailers, which may have a tougher time dealing with persistent inflation and a rockier economy.

The outlook may not be great following a rough quarter, but a near 20% drop in the past week or so seems overdone.

Wall Street’s Take

Turning to Wall Street, WMT stock comes in as a Strong Buy. Out of 27 analyst ratings, there are 22 Buy recommendations and five Hold recommendations.

The average Walmart price target is $157.11, implying upside potential of 27.1%. Analyst price targets range from a low of $134.00 per share to a high of $181.00 per share.

The Bottom Line on Walmart Stock

Inflation has worked its way into Walmart’s bottom line. Still, if there’s a company that can strategically increase prices without upsetting price-sensitive consumers, it’s Walmart.

The company has a legendary value proposition that’s tough to match, thanks to the firm’s pricing power. In due time, investments in tech will allow Walmart to improve its margins while passing on even more value to its customers.

Eventually, we’ll get used to the higher prices. For now, I expect consumers to pivot to lower-cost private-label merchandise to reduce the impact of higher prices.

Discover new investment ideas with data you can trust.