While the stock market has enjoyed a positive year overall, the consumer staples sector hasn’t mirrored this success. Companies in this sector, including those selling essential goods like food, have struggled to keep pace. The Consumer Staples Select Sector SPDR Fund (XLP) has delivered a total return of only around 15% this year, lagging behind the S&P 500’s nearly 23% mark. However, some consumer staples stocks have defied this trend, and Walmart (WMT) stands out as a notable example.
As the largest company in its sector, boasting a market capitalization of approximately $660 billion, Walmart has experienced a substantial surge in its stock price this year. But with its impressive performance, a question arises: is Walmart a buy-and-hold investment destined for long-term success, or has the stock already reached its peak?
Walmart: Winning the Grocery Wars
Walmart’s success can be attributed to its omnichannel approach, catering to customers through both its physical stores and its robust e-commerce platform. While its U.S. segment accounts for the largest share of its revenue (approximately 68%), its international and Sam’s Club operations contribute a significant 18% and 14%, respectively.
To gain insight into Walmart’s business model, it’s helpful to analyze its U.S. segment, as it provides a consistent breakdown of revenue by product type. Groceries represent the largest portion of its U.S. revenue at 60%, followed by general merchandise at 26%, health and wellness at 12%, and other categories making up the remaining portion. This revenue breakdown mirrors the strategy of Costco (COST), where 54% of its revenue is generated from food and 25% from non-food items.
Walmart has gained a significant edge by capturing grocery market share from its competitors. The company has increased its overall grocery market share to 23.6%, a 1.5% increase from 2021 to 2023. This trend extends to online grocery sales, where Walmart has seen a remarkable increase.
This success isn’t entirely surprising, considering the substantial rise in inflation, which has impacted food prices disproportionately over the past few years. Since September 2021, grocery prices have surged over 17%, outpacing the overall inflation rate of 15%. This economic reality, combined with the lingering impact of the pandemic on consumer sentiment, has made consumers more cautious with their spending. This shift in consumer behavior has benefited Walmart significantly.
The company’s immense scale allows it to offer lower prices compared to its competitors, attracting budget-conscious consumers. The nearly 10% increase in Walmart’s online grocery sales market share from the second quarter of 2021 to the most recent quarter is a clear indication of this trend.
Sustaining Advantage Through Value and Innovation
Walmart’s continued success hinges on its ability to provide cost savings to its customers. Despite positive economic indicators, including low unemployment, a robust stock market, and easing inflation, consumer sentiment remains subdued. This perceived economic uncertainty is likely due to the lingering effects of inflation, which has eroded consumers’ purchasing power. Even though inflation is slowing, consumers are still paying 17% more for groceries than they were previously. Until consumers experience a tangible improvement in their financial well-being, they are likely to remain loyal to stores offering the most competitive prices.
Beyond offering value, Walmart differentiates itself by embracing innovation and venturing into new markets. In contrast to many consumer staples companies that prioritize maintaining the status quo, Walmart actively seeks growth opportunities.
The expansion of its e-commerce business has enabled Walmart to generate revenue from ad space, a higher-margin business compared to traditional grocery sales. The company is also venturing into the third-party marketplace arena, allowing it to earn commissions on products sold by other parties and gain valuable insights into customer purchasing patterns.
Walmart Remains a Top Choice
As with many industry-leading companies, Wall Street analysts have consistently increased their price targets for Walmart as the company’s stock price has risen. Walmart’s commitment to providing exceptional value to its customers, combined with its proactive approach to innovation and expansion, makes it a compelling investment opportunity. It remains a top pick for investors seeking long-term growth in the consumer staples sector.
