Nov 15, 2022

Earnings Write-up: Walmart Q3 Earnings

Earnings Write-up: Walmart Q3 Earnings

WMT (+6.8%) big takeaways


Investment implications:

This was an excellent quarter from Walmart where they ticked every box. Inventory came down in remarkable fashion and is now roughly in line with revenue growth. I expect markdowns to decelerate significantly (and maybe even decline sequentially). This should further boost margins; in fact, I think WMT could post Y/y margin increases in its critical FQ4.

Customers are responding to sales and events. Spending around back-to-school was strong and the holidays appear to be off to a surprisingly good start. Walmart is gaining market share with consumers making >$100k/year. And while there is trade-down and customers are mixing toward lower-margin grocery items (from higher margin general merchandise) I am very encouraged that the company has been able to improve its gross margin trend in light of that.

Inflation continues to be an issue. Ticket was up +6% in the quarter in the US and that wasn’t enough to offset cost inflation pressures. But Walmart is increasingly demonstrating itself to be the place of everyday low price; that message appears to be resonating with consumers.

With respect to other retailers, I think the read is mixed. Target mixes more toward general merchandise and while they are strong at events, this quarter was more about WMT self-help (inventory), grocery and higher-end consumers rather than overt strength in the American consumer. Gun to my head, TGT is poised to do well. But I would not go out on a limb and they could well have actually lost share. COST is a conundrum. While the Sam’s Club acceleration and the mix should bode well for COST, we saw the deceleration in October and that gives me pause for thought. I would not add to COST here.

As a sidenote, Walmart took a $3.1b charge related to the ongoing opioid issues. But that was known and excluded from the adjusted results. The company has approved a new $20b share repurchase program.




Operating margin:

  1. Increased general merchandise markdowns (especially in apparel)
  2. Category mix shifts toward grocery, away from general merchandise
  3. Offset by pricing

FY23 Earnings guidance:

Benjamin Nye, CFA, FRM

Chief Investment Officer, Portfolio Manager

Ben arrived at Narwhal from a small investment firm in Eugene, Oregon, where he cut his teeth investing in individual stocks, bonds and derivatives. He earned the right to use the CFA designation in 2016, holds his Series 65 license and is a certified Financial Risk Manager. Ben received a bachelor’s degree in finance from the University of Washington and a MBA from Emory University's Goizueta Business School. In his free time, he plays competitive tennis, mentors for Mentoring for Leadership and is a frequent contributor to The Investing Podcast.

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