3 reasons why Walmart is a big winner compared to other retailers. Time to buy the stock?

Walmart (WMT 0.16%) seems to be in full swing right now. The second quarter results were so solid, in fact, that shares hit a record high immediately after the recently released report was released. In addition, Walmart’s strong second quarter numbers have investors concluding that the economy and consumption are healthier than they thought less than a week ago. This bodes well for rival retailers like Goal And Kroger.

Just because Walmart succeeds in a difficult environment doesn’t mean its competitors can’t. This company is clearly different from other comparable retail chains. It is better positioned to succeed regardless of the economic backdrop.

But that does not mean that the stock is currently a buy.

An encouraging quarter

In the three months through July, Walmart posted revenue of $169.3 billion and earnings of $1.67 per share, up from a year earlier ($161.6 billion and $0.61, respectively) and better than the $168.5 billion in revenue and $0.65 per share in earnings that analysts had expected. While most of the growth in the quarter came from grocery sales, comparable-store sales growth (US, excluding fuel) was 4.2 percent. E-commerce sales rose 21 percent and gross margins also improved.

In other words, it was a solid quarter—solid enough that Walmart was able to raise its full-year sales and profit forecasts, and solid enough that CFO John David Rainey commented during the second-quarter conference call, “We have not seen any additional burden on consumer health in our business.” Analysts and investors readily extrapolated that observation to other retailers’ businesses.

Maybe that’s a fairly fair assumption.

However, it would not be unfair to assume that Walmart is using its sheer size and the opportunities it provides to outperform its competitors. Three details from the retailer’s Q2 report subtly demonstrate this superiority.

3 Signs Walmart Is Outperforming Its Competitors

First, Walmart’s inventory levels continue to decline, reaching levels not seen since the COVID-19 pandemic. At the end of last month, the company’s inventory-to-sales ratio was 32.8%, below its 2022 high of 42.7%.

On the surface, it seems problematic – you can’t sell goods you don’t have. But that’s not the big risk in retail. The real risk is buying more goods than you can sell, leaving less room (and money) for more marketable goods. Also, the longer inventory sits on a store’s shelves, the more likely it is to be stolen, damaged or lost.

As the chart below shows, Walmart – like most other retailers – increased inventory in the final days of the pandemic, anticipating a post-pandemic increase in spending that never materialized. Not surprisingly, gross margins fell shortly thereafter. As inventory has returned to more historical levels, gross margins have also returned to normal.

Data source: Walmart Inc. Chart by author.

It is a sign that Walmart has regained control over how much stock it needs at any given time, and which goods that it needs at a specific time. While they are certainly trying, it remains to be seen whether the competition will be able to follow suit.

Second, although investors are not aware of the exact figures, Walmart announced that revenue from its global advertising business improved 26% year-on-year in the last quarter. In the US alone, this business grew 30%.

In case you don’t know, the world’s largest brick-and-mortar store chain doesn’t just make money selling goods online and offline. Its shopping website also lets brands and third-party sellers pay to advertise their goods on Walmart.com. The company doesn’t regularly reveal many details about this business other than providing a relative growth number. However, Walmart did announce in early 2022 that it did $2.1 billion worth of digital advertising deals last year. That business has grown every year since then at a pace comparable to the previous quarter.

It’s obviously still not a primary source of revenue. However, it’s a high-margin revenue stream based on an online shopping platform that Walmart would operate whether it makes money from advertising or not. For comparison, although the retailer posted $169 billion in sales last quarter, operating income was only $7.9 billion. The advertising department’s impact on the bottom line is not insignificant.

It is important simply because Walmart.com is one of the most important e-commerce addresses, according to Amazon within the United States. No other competitor will come close to Walmart’s online shopping appeal. The company is simply too big and too present.

Finally, while the company remains tight-lipped on details, Walmart+ membership growth was (again) double-digit last quarter, resulting in a 23% increase in membership revenue.

The benefit of a growing Walmart+ customer base isn’t immediately apparent. But it’s there if you look closer. As these customers took advantage of the free shipping and delivery offer, the total number of transactions in U.S. stores increased 3.6% year over year last quarter. E-commerce growth was also driven by store-based fulfillment and delivery, which in some cases can be completed the same day the order is placed.

This is also a business success that other competitors with brick-and-mortar stores will find difficult to replicate, simply because they do not have Walmart’s reach or extensive product range.

To buy or not to buy?

So the company’s superior competitive position makes the stock a buy? Don’t be too hasty with this decision.

Although investors should expect to pay a premium for high-quality stocks, this high-quality name is arguably out of reach following the release of second-quarter earnings. Walmart shares currently trade at more than 27 times next year’s expected earnings. Even if that consensus estimate understates the actual expected earnings, this stock is still uncomfortably expensive compared to its historical average.

Just don’t be too stingy or wait too long to get in. A slight slowdown in the rally after the earnings release could be the only pullback we’re in for here. It’s becoming increasingly clear that the new and improved Walmart is designed to thrive in any economic environment. Investors probably won’t let the price fall for long before they start buying it again. That’s just how promising the stock is.