Reading current financial headlines might cause concern for those considering investing in stocks, given the discussions around tariffs, persistent inflation, and the threat of a recession. However, it remains crucial to maintain a long-term perspective. Although navigating volatile market conditions is difficult, predicting short-term movements is impractical. Investors are generally rewarded by focusing on purchasing shares in robust businesses, despite temporary market fluctuations.
Walmart, a long-standing successful retailer, exemplifies a company that many financial analysts recommend adding to a portfolio. Despite the competitive nature of the retail industry, Walmart continues to maintain a strong position. Several factors contribute to this success.
#### 1. Well-Executed Business Strategy
Many organizations focus on cost containment, but for Walmart, this practice is deeply embedded in its corporate culture. Since the first discount store opened in the early 1960s, Walmart’s management has prioritized minimizing costs to offer consumers lower prices. The effectiveness of this strategy is evident as Walmart serves over 250 million shoppers each week through its physical stores and online platforms. This approach has yielded positive results, with Walmart reporting over $680 billion in revenue for the last fiscal year ending January 31. This figure represents a 5.6% increase when adjusted for foreign currency translation effects, and the company’s adjusted operating profit increased by 9.7% to $29.7 billion.
#### 2. Engaging Consumers
Though past performance does not ensure future success, Walmart’s strong market position equips it well for growth. The retailer consistently attracts large numbers of customers, particularly during difficult economic periods marked by inflation. In the fourth quarter, Walmart recorded a 4.6% increase in same-store sales in its core U.S. segment, with 2.8 percentage points of this growth attributed to increased customer traffic. The company continues to capture market share from competitors and is drawing a higher-income demographic. Amid higher tariffs and potential recessionary pressures, Walmart’s low prices position it favorably to grow both its customer base and revenue, allowing it to thrive even in challenging economic conditions.
#### 3. Investing in Future Growth
Walmart’s management has not become complacent. The company continually invests in technological advancements to sustain its competitive edge and looks toward future innovation. This year, Walmart plans to allocate 3% to 3.5% of its sales for capital expenditures, a substantial investment given the company’s approaching $700 billion in annual sales.
These investments aim to enhance the consumer experience by including initiatives like online ordering and in-store pickup, with many locations offering same-day delivery. Walmart has also ventured into new areas, such as Walmart+, a subscription service that offers benefits like free shipping, streamlined checkout processes, and discounted fuel prices.
Additionally, Walmart leverages its vast customer base to drive its advertising business, which is currently a minor revenue stream, accounting for less than 1% of the company’s annual earnings but experienced a 27% growth last year. Over time, advertising holds the potential to become a significant revenue contributor due to its profitability.
#### Conclusion
The combination of ultra-low prices, convenience, and a forward-looking management team striving to preserve its competitive advantage forms a compelling long-term investment case for Walmart. Investor expectations, reflected in the stock price, have been high, resulting in nearly a 39% increase over the past year through March 13, outpacing the S&P 500 by approximately 20 percentage points.
Walmart’s shares currently trade at a price-to-earnings (P/E) ratio of 35, compared to the S&P 500’s 28. For those cautious about the valuation, a steady investment approach, such as dollar-cost averaging, can be implemented. This strategy involves investing a fixed amount regularly, allowing investors to smooth out their purchases while planning to hold Walmart’s shares over the long term.
