Introduction

In our initiating coverage report, we have highlighted how Walmart (WMT) has been one of the darlings of Wall Street having risen over 51% since the March bottom compared to the S&P 500's 17% rise. The retailer was a major beneficiary of the COVID-19 pandemic as consumers flocked into stores to spend their stimulus checks. The discount chain has been leveraging its massive store network and investments in digital to supply food and essential items during the times of pandemic. And henceforth, revenue, earnings growth, and share price followed.

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Data by YCharts

Q2 Earnings Corner

The company smashed away the analyst expectations posting its one of the biggest quarterly earnings surprise since its listing. The retailer reported a 9.3% same-store-sales growth in the US, slightly lower than Q1, with e-commerce sales surging a record 97% as consumers increasingly looked for staying home and shopping online. Gross margins improved as consumers looked to purchase general merchandise and other high-margin products compared to only food and essential items earlier. Walmart International tempered down the otherwise strong US results, with sales rising a modest 1.6% particularly as Flipkart in India continued to face government lockdowns with similar trends observed in African and certain other markets. The company's margins were hit by 43 bps as a result of increased spending on bonuses and COVID-19 related payments. However, that part was not much of a deterrent to the company's strong growth overall. Robust sales growth in US, shift to high-margin products and lower losses in its e-commerce business led the company to post an Adjusted EPS of $1.56 topping the analyst estimates pegged at $1.25.

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Investment Thesis

As highlighted in my report earlier, Walmart was expected to post a stronger set of numbers. While the earnings reported were a positive surprise, the management did hint at normalizing trends going forward. As the benefits of stimulus checks fade away, sales started to normalize with July comp sales still growing at 4%. Reiterating from our previous report, Walmart is no growth stock and as the things normalize to long term same-store sales trends of around 3% growth, it is highly unlikely the company could repeat its performance. The stock continues to trade at a massive 25x P/E, significantly higher than its long-term average. We continue to be Neutral on the stock and do not tip the risk-reward favorable to initiate fresh longs.

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Data by YCharts