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Stock Analyst Update

Walmart Delivers; Shares Fully Valued

Strength in its domestic physical and digital operations has propelled results, and we expect the retailer to continue to successfully adapt to a changing retail landscape.

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We do not plan to make a large change to our $96 per share valuation for wide-moat  Walmart (WMT) after it posted on-track third-quarter earnings. Strength in its domestic physical and digital operations has propelled strong year-to-date results, and we believe the performance supports our contention that the firm can continue to deliver returns even as it adapts to a changing retail landscape and builds omnichannel strength. Our long-term forecast is largely intact (low- to mid-single-digit percentage revenue growth, 4% adjusted operating margins, on average, over the next decade).

Year-to-date sales rose 3% against a 4.2% operating margin. In addition to strong domestic performance, ongoing strength in Mexico (which saw 6.3% quarterly comparable sales growth) highlighted results for Walmart's international operations, which accounted for about a quarter of fiscal 2018 sales. Management revised its adjusted EPS guidance to $4.75 to $4.85 from $4.65 to $4.80, against our $4.88 expectation.

Third-quarter comparable sales (excluding fuel) at Walmart U.S., which accounted for roughly 65% of fiscal 2018 sales, rose 3.4%, with balanced ticket (2.2%) and traffic (1.2%) growth. Expansion came on top of hurricane-related sales momentum in the same period last year, which we believe highlights the strength of the results and is consistent with the generally favorable recent marks posted by retailers in the American market. We believe the firm's rapidly growing digital offerings should continue to lift the segment (e-commerce contributed about 140 basis points to Walmart U.S.'s comparable sales growth); it added around 300 grocery pickup locations in the quarter and now delivers from 600 stores, up from around 320 at the end of the second quarter. We believe Walmart's competitive advantages should enable a leading omnichannel experience, underpinning our low-single-digit segment top-line expansion expectations over the next decade despite an ongoing need to keep prices low.

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Zain Akbari does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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