Is Walmart a Buy After Its Latest Earnings Report?

Shares of Walmart (NASDAQ: WMT) were moving lower on Thursday after the retail giant, which receives nearly 10% of non-automotive retail spending in the U.S., said it was seeing evidence of consumers cutting back due to higher gas prices and the impact of the Iran war.

As of 12:27 p.m. ET, the stock was down 7.6% on the news, even as its results were solid, a unnusually large sell-off for the normally stable stock.

Before digging into whether Walmart is a buy now, let's review the first-quarter results.

Image source: Walmart.

Why Walmart stock was down

Walmart delivered solid results in the quarter, beating top-line estimates and meeting bottom-line estimates.

Comparable sales were up 4.1% at Walmart U.S. stores, excluding fuel, and operating income rose 5% in its core segment. Overall revenue increased 7.3%, or 5.9% in constant currency, to $177.8 billion, which topped expectations at $174.8 billion. Adjusted earnings per share rose from $0.61 to $0.66, which matched the consensus.

Walmart continued to deliver strong results in grocery and general merchandise, with sales up mid-single digits. Its strength in grocery reflects ongoing momentum in the category, and it said it achieved its highest level of share gains in general merchandise in five years.

Walmart maintained its guidance for the full year, calling for a revenue increase of 3.5%-4.5% and adjusted EPS of $2.75-$2.85, though that was below the consensus at $2.92. For the second quarter, it sees revenue growth of 4%-5% and adjusted EPS of $0.72-$0.74.

Management also noted financial distress among its lower-income consumers, saying that the average number of gallons consumers pump per visit fell below 10 for the first time since 2022. Those kinds of comments seem to contribute to the sell-off as management acknowledged that the closure of the Strait of Hormuz would likely add to pricing pressure in some categories.

Is Walmart a buy?

The price action in Walmart stock is similar to Target's movement on Wednesday, as Target stock was up modestly after its earnings report, but then fell after management indicated cautiousness. Walmart fell on its report, but then moved lower during the earnings call and when the regular session opened.

The sell-off in Walmart not only reflects uncertainty about the economy, but also the stock's valuation, which has gotten stretched after several years of outperformance.

Even based on its forward adjusted EPS guidance and with the pullback, Walmart still trades at a price-to-earnings ratio of more than 40. That's significantly higher than the S&P 500 as well as peers like Target and Kroger, though it's less than Costco.

Walmart might deserve a premium given its competitive advantages, but this is still a mostly mature business. The company has made impressive gains in areas like e-commerce and with Flipkart, its Indian e-commerce subsidiary, but investors can only expect so much from a retailer forecasting 4% revenue growth.

We'll see if Walmart's cautiousness is warranted, but at this point, waiting for a better price looks like the smart move. After so much multiple expansion from the retail stock, the upside potential seems limited.

Jeremy Bowman has positions in Target. The Motley Fool has positions in and recommends Costco Wholesale, Target, and Walmart. The Motley Fool recommends Kroger. The Motley Fool has a disclosure policy.