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Below is a complimentary research note from our Retail analysts Brian McGough and Jeremy McLean. We are pleased to announce our new Sector Pro Product Retail Pro Click HERE to learn more. |
Couldn’t ask for much more from Wal-Mart (WMT) than what it delivered this quarter.
Put up a 9.3% comp, leveraging that to 23% EPS growth -- smoking the consensus by 25% (which is a colossal variance for a name like WMT).
Its’ ecomm business doubled vs last year – up 97% -- and now sits at 11% of sales vs 6% a year ago. The company’s margin performance was impressive in light of ecomm driving the top line – something that is dilutive for names like TGT.
But it’s evidently not quite dilutive for WMT, which has been investing in digital infrastructure and DCs to drive the business in an Amazon-esque way rather than the unscalable and un-leverageable ship-from-store like most other retailers.
We’re seeing continued consolidation of shopping trips, as WMT transactions were down 14% partially due to social distancing with WMT limiting the number of shoppers into each store at a time. But average ticket was up a killer 27%, partially driven by higher basket size associated with WMT’s ecomm business.
But the real driver to ticket was stimulus, and in fact, management noted that comps reverted back down to a mid single digit rate as stimulus tapered. The mean-reversion in top line is not the end of the world for us, but when combined with wage inflation and macro Quad 3 (inflation accelerating, with real growth slowing for a stagflation environment, very bad for ‘staple-like’ retail) we think we just saw the best WMT can/will deliver.
As such, we’re removing WMT from our Best Idea Long list. On the labor front, this wage inflation was the one major theme that came from both WMT and HD earnings. We’ve been talking about it for months and it is hitting the P&L to an even greater degree than we modeled.
Slowing sales, Covid procedural expenses remain, wage inflation, and the potential for COGS inflation and further margin pressure as the consumer will likely not be able or willing to endure higher prices.
This is a problem for all of retail, but with WMT as the mother lode proxy for the retail group, we can’t call it a Best Idea anymore with the stock at all time highs, and sales slowing as costs head higher.
