Goldman Sachs analyst reaffirms Walmart stock despite consumer challenges

Goldman Sachs analyst reaffirms Walmart stock despite consumer challenges

The outlook for Walmart's crucial back to school and holiday shopping seasons remains far from certain as more shoppers buy canned tuna and chicken and even beans instead of deli meats amid eye-popping inflation.

That isn't the same as Goldman Sachs has a bullish rating on shares of the world's largest retailer in the wake of Walmart's mixed second quarter earlier this week.

We reiterate our buy rating for Walmart given 1 strong top-line trends along with market share gains, 2 moderate markdown pressure expected from here, supported by an improved inventory position, which has been the recent overhang on the stock, and 3 the long-term algorithm 4% top line and even better operating income growth, McShane explained.

McShane lifted her full year profit estimate on Walmart to $5.89 from $5.69 a share, adding markdown pressure seen in the second quarter that should abate due to inventory clearances. For 2023, McShane estimates earnings of $6.44, about 3% higher than her previous modeling.

Despite the uncertainty, Walmart handed bulls like McShane some positives on its earnings day Tuesday.

Walmart's same-store sales at its namesake U.S. division and Sam's Club rose a better than expected 6.5% and 9.5%, respectively. Execs credited the pullback in gas prices as lifting sales toward the end of the quarter, a trend that has continued into the beginning of the back to school shopping season.

Walmart revised its full year guidance for profits to drop 9% to 11% from a previous range for a 11% to 13% decline.

Walmart stock, a component of the Dow Jones Industrial Average, is up 8% over the last five trading sessions compared to a 1.1% loss for the broader index.

Walmart is still battling consumer challenges that could easily zap recent positive demand trends.

"I think the consumers are still relatively healthy," John David Rainey, Walmart CFO, told Yahoo Finance. We've seen changes in consumer behavior that I put in three categories. There is a trade down in quality and quantity. We're seeing things like canned tuna and chicken and even beans increase in value over 25% in the quarter, so we're seeing deli meats instead of buying deli meats. They're buying smaller pack sizes to save money. In the first quarter, we saw an increase in the growth effect of private brands, it's 2 x for food, which is what it was in the first quarter. Sozzi follows BrianSozzi on Twitter and LinkedIn.