Walmart's latest earnings paint an interesting picture of the economy.
While the stock market has generated strong returns over the last couple of years, the broader macroeconomic picture has been cloudy at best.
Inflation has been abnormally high compared to historic levels. Moreover, a series of interest rate hikes by the Federal Reserve has significantly affected consumer purchasing activity. U.S. job data has also been inconsistent. Perhaps unsurprisingly, some economists and investors have been concerned that the U.S. could be headed toward a recession.
But after digesting Walmart's (WMT 1.06%) latest earnings report, I've come to temper my own recessionary fears. Let's break down Walmart's impressive quarter, and explore why the stock looks like a great buy right now.
The importance of same-store sales
One of the key performance indicators of a retail business is same-store sales. This provides you with a look at how consumer purchases are trending among specific locations over a period of time. If this metric is rising, it implies that people are going back to your stores and converting into repeat shoppers.
The table below breaks down Walmart's same-store sales among various geographic markets through the first half of the company's fiscal 2025. On the surface, these figures might look like a mixed bag. Sales are accelerating in the U.S. and China, while Canada is somewhat flat and Latin America's results have been more inconsistent.
| Location | Q1 FY25 | Q2 FY25 |
|---|---|---|
| U.S. | 3.8% | 4.2% |
| Mexico and Central America | 9.2% | 5% |
| Canada | 3.8% | 3.4% |
| China | 12.5% | 13.8% |
Data source: Investor relations.
Consumer resiliency at its finest
Nevertheless, same-store sales are only part of the equation. A deeper look at some of Walmart's other operating metrics will help show how the retailer has become a top destination for consumers in this tough economy.
When a retail business reports rising sales figures, it's important to understand what is driving the increases. For example, revenue could be rising simply due to inflation. When this is the case, it's not necessarily a good sign for the economy. Essentially, it implies that passing higher prices on to the consumer is the main source of growth. That model is not sustainable in the long run.
On the other hand, improving trends in transactions and unit volumes can signal that people are buying more goods at your stores. This is a good thing because it implies that shoppers may prefer your inventory selection and are accepting of the price points.
For its fiscal second quarter, ended July 26, Walmart U.S. generated a 3.6% increase in transactions year over year, while the average shopping cart rose by 0.6%. Furthermore, at the company's subsidiary, Sam's Club, transactions rose by 6.1% year over year.
Walmart attributed the increases in transactions and average ticket to unit growth in produce and meats, personal care and beauty products, increased pharmacy sales, and some grocery-related inflation.
To me, this is a pretty solid picture overall. Although some of this growth is adjacent to inflation, Walmart's operating metrics suggest that customers are becoming repeat shoppers and buying more of their necessities from the company.
Image source: Getty Images.
Is Walmart a good stock to buy right now?
The chart below illustrates Walmart's forward price-to-earnings (P/E) ratio over the past year. Investors can see that over the last several months in particular, the company's forward P/E has experienced some dramatic valuation expansion.
WMT PE Ratio (Forward) data by YCharts.
In contrast, the forward P/E of the S&P 500 has dropped from a high of 28.5 earlier this year to its current level of 21.7. These dynamics paint a really interesting picture. Investors appear to have become more bullish on Walmart at the same time they are becoming less optimistic about the broader market.
It's hard to say if declining valuation metrics for the S&P 500 suggest a full-blown recession. However, it's possible that this normalization could hint that some investors are anticipating an economic slowdown. At the end of the day, it's just too hard to say with any certainty if a recession is looming or not.
I think Walmart has demonstrated its ability to acquire and retain large cohorts of customers across many different demographics and geographic environments. This should help the company slowly unlock a path to newfound customer loyalty over time, which will help strengthen its position as a leading retailer for consumer staples.
For these reasons, I see Walmart as a great long-term buy during this time of economic uncertainty and think the company will continue to thrive -- regardless of whether there's a recession or not.
Adam Spatacco has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Walmart. The Motley Fool has a disclosure policy.
