Backing down from the deflation call (WMT) – Buy WMT instead of its competitors
Walmart reported Q4 EPS of 1.80 vs. the consensus estimate of 1.65. The upside was driven by sales and margins. U.S. SSS ex. gas increased 3.9% vs. the 3.2% consensus estimate. Walmart U.S. stores SSS ex. gas increased 4% vs. the consensus estimate of 3.1%. Strength was reported in grocery and health & wellness, offset by softness in general merchandise. Grocery SSS increased by MSD%, gaining share in dollars and units. Grocery inflation was +LSD%, but it moderated by 150bps from Q3. Health and wellness SSS increased by mid-teens% due to strength in the pharmacy. Transactions increased by 4.3%, and average ticket decreased by 0.3%. Walmart stores saw strong share gains among higher-income households. Management reported gaining share in nearly every category. Walmart inventory decreased by 4.5%. E-commerce sales grew 17%, benefiting SSS by 240bps. Sam’s Club U.S. ex. gas SSS increased 3.1%, 10bps above expectations. Sam’s transactions grew by 3.6% while ticket decreased by 0.4%. Strength was seen in food, consumables, and healthcare. Membership income grew 10%. Sam’s inventory decreased by 8.1%. SSS increased by 1.8% in Canada with food and consumables outpacing general merchandise.
Gross margins expanded by 39bps, driven by managing prices and lower levels of markdowns partially offset by the timing of a Flipkart event and mix pressure in the U.S. Overall inventories decreased by 3%. Strong inventory management has helped fund increased promotions like rollbacks, which were up 50%. SG&A was deleveraged by 16bps due to higher variable pay from exceeding planned performance. Sam’s gross margins expanded by 22bps, and EBIT expanded by 2bps.
Management guided the new year to 6.70-7.12 vs. the consensus of 7.09. Guidance for Q1 is 1.48-1.56. Management has been guiding conservatively, so the EPS range is not worrisome. Management said deflation is still possible but less likely based on what was observed in Q4. Walmart is likely to see some sticky inflationary trends and possibly some emerging reinflation trends to reverse its prediction of deflation. Our Macro team has been calling for Quad 2 and 3, reflecting accelerating inflation. Walmart continues to gain share, inventories are in good shape, and deflation will not be a headwind. The share price reflects the strong momentum and possibly the absence among most of its competitors. Walmart is a Best Idea long.
Day 1 CAGNY thoughts
Based on the attendance at the conference, there is a large group of investors that is interested in Consumer Staples. It’s difficult to accept the “it’s boring” characterization of the sector after seeing the size of the packed room.
The attendees’ focus is on determining whether the CPG companies presenting at CAGNY can return to volume growth after turning up the dial on price increases over the past two years. Investors also want to see if 2025 will be an “on-algorithm year.” Most company presentations run through the potential revenue drivers, including volumes, distribution, marketing-driven, innovation, and M&A. Price is missing for nearly everyone. Cost savings plans are also detailed as an offset to remaining inflationary pressures. The companies with the most credible drivers appear to be the winners.
On day 1, management teams reaffirmed guidance that, in most cases, was recently issued. CAGNY is not a forum where management teams want to lower expectations.
