walmart (WMT -1.07%) Stocks are traditionally seen as a safe investment during recessions. The retail titan, which has navigated dozens of dropouts in demand over the past few decades, usually thrives when consumers focus on commodities and want to stretch their budget.
But many investors are still avoiding the stock today, especially after the chain lowered its earnings outlook. Heading into what could be a tough shopping season for the holiday season, Walmart appears to be facing inventory challenges that could hurt profitability in 2023.
With that big picture in mind, let’s see if the retailer is a good buying candidate right now.
The latest trends
Investors have mixed expectations for the company through early 2023. Walmart’s sales trends are holding up, with customer traffic up 1% in the most recent quarter, on top of massive gains over the past two years. Target growing faster, but Walmart remains a leader in massive retail space even as consumers make major changes to their shopping pattern.
The earnings outlook is not so rosy. Walmart recently confirmed a weak earnings forecast due to several headwinds, including home furnishing inventory oversupply, rising costs and currency shifts.
Operating income is down 7% in the first half of fiscal 2023 and is likely to fall as much as 11%, according to management’s forecast in mid-August. Free cash flow has been hit even harder by the combination of higher spending and slower sales growth.
Reasons to buy:
Walmart appears to be a relatively safe option for investors seeking lower-risk options in a volatile market. Management is already shifting merchandising strategies to more essentials ahead of the shopping peaks during the fall and winter, so the worst price cuts may be behind the company.
Margins aren’t shrinking as quickly as competitors like Target, either, in part because of Walmart’s massive presence in stable areas like grocery and health. While sales of electronics and home products are declining, that diversity helps the business continue to grow, while businesses love Best Buy report refuses.
The multi-channel selling position keeps total sales up, even if e-commerce specialists like it way fair post large revenue declines. Here’s another way Walmart’s size gives it a huge competitive advantage. A key factor in a recession-proof business is steady sales growth through many types of sales environments.
Is it a deal?
Walmart’s stock price has fallen, making it a more attractive long-term asset. Investors today pay 0.6 times the annual revenue for the company, compared to 0.7 times for Target and about 1 times the revenue for Costco.
Of course, Walmart is not as profitable as Target. And it doesn’t take advantage of the massive stream of membership revenue that keeps Costco’s revenue stable through economic fluctuations. But it is a major shopping destination for millions of consumers, who continue to visit the stores during recessions. Walmart’s financial strength makes it one of the few companies that can continue to invest in growth even in a downturn.
Those factors, plus the stock’s dividend yielding close to 2% today, make it an attractive option for many investors. Stocks may not rise as high during the next economic upswing. But it’s also unlikely that Walmart’s stock will crash at a time when the broader market is falling.
Demitri Kalogeropoulos has positions in Costco Wholesale. The Motley Fool holds positions in and recommends Best Buy, Costco Wholesale, Target and Walmart Inc. The Motley Fool recommends Wayfair. The Motley Fool has a disclosure policy.