Market sell-off: Is Walmart a buy?

walmart (WMT -0.98%) Stocks are traditionally considered a safe investment during recessions. The retail titan, which has weathered dozens of demand slumps over the past few decades, tends to do well when consumers are focused on basics and looking to stretch their budgets.

But many investors are still avoiding the stock today, especially after the chain cut its earnings outlook. Heading into what could be a tough holiday shopping season, Walmart appears to be having inventory issues that could hurt its profitability through 2023.

With that big picture in mind, let’s take a look at whether the retailer is a good buy candidate right now.

The latest trends

Investors have mixed expectations for the company through early 2023. Walmart’s sales trends continue, with customer traffic up 1% in the last quarter, on top of huge gains in the past two years. Target is growing faster, but Walmart remains a leader in the massive retail space, even as consumers dramatically change their shopping habits.

The earnings outlook is not so bright. Walmart recently confirmed a weak earnings forecast due to several headwinds, including an oversupply of home furnishings inventory, soaring costs and exchange rate swings.

Operating profit is down 7% in the first half of fiscal 2023 and will likely fall as much as 11%, according to management’s forecast in mid-August. Free cash flow was hit even harder thanks to the combination of higher expenses and slower sales growth.

Reasons to buy

Walmart appears to be a relatively safe option for investors looking for low-risk options in a volatile market. Management is already shifting its merchandising strategies toward more essential products ahead of holiday shopping peaks in the fall and winter, so the worst of its price cuts could be behind the company.

Its margins aren’t shrinking as fast as peers like Target either, in part because of Walmart’s huge presence in stable areas like groceries and healthcare. While its sales of electronics and home products are on the decline, this diversity is helping it continue to grow while companies like best buy report declines.

Its multi-channel selling position, meanwhile, is keeping overall sales up even as e-commerce specialists like Wayfair show big drops in sales. Here’s yet another way Walmart’s size gives it a huge competitive advantage. A key factor in a recession-proof business is that revenues grow steadily across many types of sales environments.

Is this a deal?

Walmart’s share price has fallen, making it a more attractive long-term holding. Investors today pay 0.6 times the company’s annual sales, compared to 0.7 times for Target and around 1 times sales for Costco.

Of course, Walmart isn’t as profitable as Target. And it doesn’t benefit from the massive revenue stream from membership fees that keeps Costco’s revenue stable during economic fluctuations. But it’s a staple shopping destination for millions of consumers, who continue to visit its stores during recessions. Walmart’s financial strength makes it one of the few companies that can continue to invest in growth even in the face of a downturn.

These factors, along with the stock’s dividend now yielding almost 2%, make it an attractive option for many investors. Stocks may not climb as high in the next economic recovery. But Walmart shares are also unlikely to crash at a time when the broader market is down.

Demitri Kalogeropoulos holds positions at Costco Wholesale. The Motley Fool holds positions and recommends Best Buy, Costco Wholesale, Target and Walmart Inc. The Motley Fool recommends Wayfair. The Motley Fool has a disclosure policy.

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