Did Walmart just allay recession fears?

While the stock market has delivered strong returns in recent years, the broader macroeconomic picture has been bleak at best.

Inflation is unusually high compared to historical levels. In addition, a series of interest rate hikes by the Federal Reserve have significantly impacted consumer spending. U.S. labor market data has also been inconsistent. Perhaps unsurprisingly, some economists and investors are concerned that the U.S. may be heading for a recession.

But after digestion Walmart‘S (WMT 0.13%) After the recent earnings report, I’ve dampened my own recession fears. Let’s analyze Walmart’s impressive quarter and examine why the stock seems like a good buy right now.

The importance of comparable sales

One of the most important performance indicators for a retail business is store sales. It allows you to see how consumer buying habits in specific locations are evolving over a period of time. If this number is increasing, it means that people are returning to your stores and becoming repeat customers.

The table below shows Walmart’s like-for-like sales in various geographic markets through the first half of fiscal 2025. On the surface, these numbers may seem mixed. Sales are increasing in the U.S. and China, while they are flat in Canada and results are inconsistent in Latin America.

Data source: Investor Relations.

Consumer resilience at its best

Still, store sales are only part of the equation. A closer look at some of Walmart’s other operating metrics will reveal how the retailer has become a top destination for consumers in this tough economy.

When a retail company reports increasing sales, it is important to understand what is causing these increases. For example, revenues could simply be increasing due to inflation. If this is the case, it is not necessarily a good sign for the economy. Essentially, it means that passing on higher prices to the consumer is the main source of growth. This model is not sustainable in the long term.

On the other hand, rising trends in transactions and unit volumes can prove to be a sign that people are buying more goods in your stores. This is a good thing because it means that customers prefer your product offerings and accept the price points.

In the fiscal second quarter ended July 26, Walmart US reported a 3.6% increase in transactions year over year, while the average basket increased 0.6%. In addition, transactions at the company’s subsidiary Sam’s Club increased 6.1% year over year.

Walmart attributed the increase in transactions and average inventory to growth in fruits and vegetables, meat, personal care and beauty products, increased pharmacy sales and some inflation in the grocery trade.

To me, that’s a pretty solid picture overall. While some of that growth is due to inflation, Walmart’s operating metrics suggest that customers are becoming repeat customers and buying more of what they need.

Image source: Getty Images.

Is Walmart stock a good buying opportunity right now?

The following chart shows Walmart’s price-to-earnings (P/E) ratio over the past year. Investors can see that the company’s P/E ratio has seen a dramatic increase in value, especially in the last few months.

WMT P/E ratio (forward) data from YCharts.

In contrast, the S&P 500’s P/E ratio has fallen from a high of 28.5 at the beginning of the year to its current level of 21.7. This dynamic paints a really interesting picture. Investors seem to have become more optimistic about Walmart while simultaneously becoming less optimistic about the overall market.

It’s hard to say whether declining valuation metrics for the S&P 500 indicate a full-blown recession. However, it’s possible that this normalization indicates that some investors are anticipating an economic slowdown. Ultimately, it’s just too hard to say for sure whether or not a recession is looming.

I think Walmart has demonstrated its ability to attract and retain large groups of customers from many different demographics and geographic environments. This should help the company slowly build a path to new customer loyalty over time, which will help reinforce its position as a leading consumer goods retailer.

For these reasons, I believe Walmart is an excellent long-term investment during these times of economic uncertainty and am confident that the company will continue to thrive regardless of whether there is a recession or not.