Walmart Is Ideal Defensive Stock: Analyst Cites Consumer Shift Towards Necessities and Cheaper Substitutes as Catalysts

Truist Securities analyst Scot Ciccarelli maintains Walmart Inc WMT with a Hold rating and raises the price target from $146 to $159.

The re-rating reflects Walmart’s favorable defensive positioning and the potential acceleration in its earnings growth algorithm in CY24+.

The analyst thinks that Walmart is increasingly cautious in its view of the “consumer” and expects mix shifts (towards lower-margin essentials) to weigh on profitability, as previously highlighted. 

Many of the “softening” data points that Walmart has commented on over the last year have continued. This trend has become even more pronounced over the last ~3 months. The mix is shifting towards necessities (food/consumables) and cheaper alternatives (private label).

The same SKU inflation seems to be broadly running higher than initially expected for 1Q (especially in dry goods grocery). Still, the company has seen a reduction in price increase requests from suppliers in just the last 6-8 weeks. 

The view is that many branded suppliers are increasingly seeing unit degradation after multiple years of price increases and growing consumer pressures and are becoming more sensitive to volume trends. 

Historically, ~80% of share losses by brands to private label alternatives prove to be permanent.

Over the last five years, the company has invested extensively in price, labor, and business incubation. However, the analyst says that the company’s “heaviest investment phases” in price, labor, and business incubation are nearly over. 

The analyst recognizes WMT as one of the safest houses on the block and could see further multiple expansion down the road if earnings growth accelerates in CY24+.

Price Action: WMT shares traded lower by 0.59% at $150.67 on the last check Wednesday.