Retail Titan's Inflation-Proof Armor - Walmart's Winning Strategy in Volatile Times Wins Analyst Cheer

Credit Suisse analyst Karen Short reiterated an Outperform rating on Walmart Inc WMT with a price target of $170.

The analyst writes WMT is well positioned for the current environment, as it continues to exhibit solid defensive characteristics, given its value-driven consumables-oriented business in the wake of a volatile consumer backdrop and significant inflationary headwinds on the consumer. 

As such, the analyst raised her WMT U.S. comp ex. fuel estimate to 6.0% from 3.5% (FactSet at 5.0%), as she believes WMT should have continued its robust sales momentum, driven by strength in food sales reflecting market share gains, growth in private label, and an estimated HSD-LDD inflation vs. mid-teens inflation in the second-half of CY22, and robust improvements in health and wellness sales, partially offset by continued softness in general merchandise. 

As a reminder, WMT noted at its 2023 analyst day that 1Q had been off to a strong start. However, week-to-week sales volatility led the company to maintain its 1Q guidance, which looks for constant currency sales growth of 4.5%-5.0% across the enterprise. 

While Snap Inc SNAP is a headwind, WMT has offset that pressure with other tender types, helped by the Social Security Cost-of-Living Adjustment (COLA) adjustment of 8.7%. 

Looking ahead, Short believes the company's goal is to meaningfully exceed the "greater than 4% operating profit growth" on the algorithm by focusing on three pillars to achieve its long-term growth targets, margin improvements, and ROI improvement. 

The analyst sees WMT entering the next phase of its growth, focusing on technology and automation to improve efficiency, with a significant component of its Opex investment cycle mainly behind – e.g., price and wage investments.

Overall, due to Short's higher sales and better SG&A leverage projections, she raised her EPS estimate to $1.35 from $1.30 vs. the FactSet consensus at $1.31 and guidance of $1.25-$1.30. 

Beyond 1Q, Short expects WMT to remain a beneficiary of a weak macro backdrop which should continue to play out through the remainder of CY23. Therefore, Short raised CY23 EPS to $6.20 from $6.15 and CY24 EPS to $6.92 from $6.80.

Short views WMT as one of the most stable and defensive names in Credit Suisse's universe.

Price Action: WMT shares traded lower by 0.73% at $152.03 on the last check Monday.

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