Image Shown: An overview of Walmart Inc.’s performance during the first quarter of fiscal 2021. Image Source: Walmart Inc. – First Quarter of Fiscal 2021 Earnings IR Presentation
By Callum Turcan
Demand for consumer staples products has surged in the face of the ongoing coronavirus (‘COVID-19’) pandemic, particularly in the US. Walmart Inc. (WMT) has been a major beneficiary of that trend. Recent operational and financial strength at Walmart of late supports its dividend growth trajectory going forward. Back in February 2020, Walmart raised its per share quarterly payout by roughly 2% sequentially, representing its 47th consecutive year of dividend growth. Shares of WMT yield ~1.8% as of this writing.
Walmart reported its first quarter earnings for fiscal 2021 (period ended April 30, 2020) back in the middle of this past May. At the end of April 2020, Walmart had $14.9 billion in cash and cash equivalents on hand versus $10.6 billion in short-term debt (‘short-term borrowings’ plus ‘long-term debt due within a year’ plus ‘finance lease obligations due within one year’) and $47.5 billion in long-term debt (‘long-term debt’ plus ‘long-term finance lease obligations’). The company’s net debt load is large but manageable, given Walmart’s impressive cash flow profile and strong liquidity position. Furthermore, Walmart retained quality investment grade credit ratings (AA/Aa2/AA) as of the end of this past April.
Walmart had $15.0 billion in total borrowing capacity under its revolving credit facilities at the end of April 2020, all of which was undrawn according to its latest 10-Q SEC filing. That included the capacity provided by its $10.0 billion 364-day revolving credit facility (which was renewed this past April) and its $5.0 billion five-year revolving credit facility that matures in May 2024 (which was renewed and extended back in May 2019 according to Walmart’s latest annual report). A combination of Walmart’s access to liquidity through its revolving credit lines and its cash-like balance on hand provides the company with ample financial firepower to ride out the storm.
Please note Walmart owns a significant equity stake in the Chinese e-commerce company JD.com Inc. (NASDAQ:JD). That stake carried a fair value of $6.2 billion as of the end of Walmart’s fiscal first quarter and is classified as ‘other long-term assets’ on the US retailer’s balance sheet. At the end of April 2020, Walmart’s other long-term assets balance came out to $16.8 billion. Should Walmart need to raise funds, it has several options to choose from.
In the fiscal first quarter, Walmart generated $7.0 billion in net operating cash flow and spent a bit less than $1.8 billion on capital expenditures, allowing for ~$5.25 billion in free cash flows during this period. Walmart paid $1.5 billion covering its dividend obligations in the fiscal first quarter and another $0.7 billion repurchasing its common stock, which were fully covered by its free cash flows. As Walmart’s debt matures, it will likely refinance those maturities with new debt offerings. Given its strong financial and operational performance of late, on top of its high quality investment grade credit ratings, Walmart will likely be able to tap debt markets at attractive rates in the future.
Quarterly Update and Outlook
Walmart reported tremendous comparable store sales and overall revenue growth in the fiscal first quarter. The firm’s Walmart US division posted 10.0% year-over-year growth in comparable store sales (aided by 74% e-commerce sales growth), its Sam’s Club division posted 12.0% year-over-year comparable store sales growth (aided by 40% e-commerce sales growth), and net sales at Walmart International were up 3.4% year over year.
On a GAAP basis, Walmart generated 8.6% year-over-year net revenue growth company-wide last fiscal quarter, a growth rate that rises to 9.7% on a constant-currency basis. Walmart’s company-wide GAAP operating income rose by 5.6% year over year as the firm faced operating cost pressures from the pandemic (including higher payroll expenses and much greater spending on sanitation and safety-related activities). However, management expects consumer spending in the US will moderate out as you can see in the excerpt down below, from Walmart’s latest quarterly conference call:
Walmart U.S. comp sales excluding fuel grew 10% with e-commerce sales growth of 74%. While we don’t normally provide monthly comp sales, it’s important to understand the flow of the quarter. E-commerce sales remained strong throughout the quarter while store traffic was quite variable due to the various stay in place orders and social distancing around the country. February sales were stronger than expected with comp sales of 3.8%. As the health crisis intensified in mid-March, we saw a surge in stock-up trips with March comps increasing about 15%. Store pickup and delivery spiked in March and remained elevated in April with sales growth of nearly 300% at peak.
Store sales slowed during the first half of April due to soft Easter seasonal sale and additional social distancing measures. In mid-April, sales reaccelerated across the business as government stimulus money reached consumers with general merchandise sales particularly strong. April comp sales increased 9.5%.
During the quarter, we saw customers consolidate shopping trips and purchase larger baskets in stores, which drove a ticket increase of about 16% while transactions decreased about 6%. With the shift in purchasing behavior, e-commerce sales contributed approximately 390 basis points to segment comp. Pickup and delivery services continue to run historically high volumes.
We’ve had a solid start to May in the U.S., but we believe stimulus spending has been a big driver, which we don’t anticipate staying at these levels throughout the quarter.
Walmart’s management team seems to be communicating to investors that the fade from fiscal stimulus efforts in the US will weigh on its revenue and comparable store growth rates going forward (relative to its banner fiscal first quarter performance). Strong performance at its digital sales channels (curbside pickup, home delivery) and e-commerce operations, on top of rising demand for consumer staples products in the face of the pandemic supports Walmart’s outlook, but the growth rates seen in the fiscal first quarter are unsustainable. Supermarkets can, generally speaking, only grow their revenues roughly as fast as regional consumer spending growth without aggressively taking market share.
Important Near-Term and Long-Term Considerations
Congress is contemplating another round of fiscal stimulus and emergency spending legislation in the US, as is the White House. President Trump has reportedly mentioned that he would be in favor of another round of direct cash stimulus payments to US households, similar to the direct cash payments provided to US households by the Coronavirus Aid, Relief, and Economic Security Act (‘CARES Act’) that was signed into law in March 2020. House Democrats have also proposed a bill that would provide another round of direct cash payments to US households, indicating there may be room here for another bipartisan compromise, though nothing is for certain. Even more importantly, debate is building on whether enhanced US unemployment benefits should be extended past the end of July.
These are important political considerations as it relates to Walmart’s near-term outlook, though what matters most is the long-term trajectory of Walmart’s future financial performance. In the upcoming graphic down below, we provide an overview of our fair value estimate of shares of WMT under our base case scenario. Our fair value estimate is derived through our discounted free cash flow analysis (defining free cash flows as net operating cash flows less capital expenditures) where we model out a firm’s financial performance into perpetuity, discount those estimated future free cash flows at the appropriate rate, and then factor in a company’s balance sheet considerations (net debt decreases the intrinsic value of a firm, net cash increases the intrinsic value of a firm) to arrive at our fair value estimate. Under our base case scenario, we give shares of WMT a fair value estimate of $109, though please note our bull case scenario, shares of WMT have a fair value estimate of up to $131. Check out Value Trap to learn more about our discounted free cash flow analysis process.
Image Shown: An overview of the valuation assumptions used in our base case scenario covering Walmart. As you can see in the graphic up above, most of the intrinsic value of Walmart’s equity comes from the Year 6+ period, meaning short-term headwinds/tailwinds aside, what matters most is the company’s long-term financial trajectory. Image Source: Valuentum
Walmart is well-positioned to ride out the storm with its current dividend policy and modest payout growth trajectory intact. The company’s revenue and comparable store sales growth rates will likely slow down on a sequential basis going forward, but its strong and growing e-commerce division (with an eye towards markets in the US and India) supports its medium- and long-term growth outlook.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This article or report and any links within are for information purposes only and should not be considered a solicitation to buy or sell any security. Valuentum is not responsible for any errors or omissions or for results obtained from the use of this article and accepts no liability for how readers may choose to utilize the content. Assumptions, opinions, and estimates are based on our judgment as of the date of the article and are subject to change without notice. The Vanguard Consumer Staples ETF (VDC) is included in Valuentum’s simulated High Yield Dividend Newsletter portfolio.