Metric sales

Should You Buy Walmart Stock? 1 metric that says yes

walmart (NYSE: WMT) investors were bracing for some tough news in the retailer’s recent earnings report – and that’s exactly what they received. The chain revealed shrinking profit margins and weaker cash flow during the second-quarter sales period, while predicting slower results in the second half.

Still, many areas of Walmart’s business are booming. It is gaining market share in the key grocery category, against competitors like Kroger (NYSE:KR). But the real metric that stands out is the channel’s uptick in customer traffic levels, compared to booming results a year ago.

The bad news

There is no watering down of bad news regarding profitability. Walmart had to cut prices to keep inventory moving in previously popular niches like home furnishings. And customers were less inclined to spend thanks to generally rising inflation.

WMT Operating Margin Data (TTM) by YCharts

These factors combined to cause operating profit to fall by 6% after taking into account exchange rate fluctuations. Net profit also fell. CEO Doug McMillon said in a press release, “The actions we have taken to improve inventory levels have put pressure on the profit margin for the second quarter and our outlook for the year.”

Good news on traffic

Yet customers aren’t giving up on Walmart as a trusted retail brand. On the contrary, more and more people are shopping there, as budgets have been squeezed by rising prices for things like gasoline. Customer traffic grew 1% on top of a 6% increase a year ago. Compare this result to Home depositwhich saw its traffic drop by 3% over the same period.

Add the nearly 6% increase in average spend to that 1% increase in customer traffic, and Walmart’s sales were up nearly 7% in the core US market. “We’re thrilled that more customers are choosing Walmart during this time of inflation,” McMillon said.

The long term outlook

Walmart raised its profit forecast for the rest of fiscal 2023, but still expects sales to fall into the double-digit percentage range. Free cash flow trends aren’t as impressive as they were last year either. These two factors help explain why the stock is down so far in 2022.

But long-term investors can look past the current profitability struggles to a brighter earnings picture over the coming quarters. Walmart seems to have been through the worst of its inventory adjustment process, after all.

Its growing market share implies higher profit margins over time once inflation subsides. And its new lines of business, such as e-commerce and digital advertising, are seeing strong growth. Of course, the retailer is expected to generate disappointing profits this year, especially compared to previous phases of the pandemic.

But its ability to attract more shoppers in key niches like groceries confirms that Walmart remains an essential weekly destination for people looking for essentials or consumer-discretionary items like clothing.

It will take a few more quarters before the economic value of this market position shows up in Walmart’s earnings. Yet the time to buy the stock is before such an earnings rally, rather than after. Walmart shares had a boring first run until mid-August, but could soon be exciting investors again.

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Demitri Kalogeropoulos holds positions at Home Depot. The Motley Fool holds positions and endorses Home Depot and Walmart Inc. The Motley Fool has a Disclosure Policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.