In this piece, I evaluated two discount retail stocks, Walmart Inc. (WMT) and PriceSmart, Inc. (PSMT), to determine which one is worth buying now. A comparison of their fundamentals reveals that both could be solid investments now.
Inflation cooled in May to its lowest annual rate over two years. The Consumer Price Index (CPI) rose 0.4% sequentially and 4% year-over-year. The higher cost of living had led customers to be more selective and sensitive to prices earlier this year. However, consumer spending remained strong thanks to the better wage gains from the strong labor market.
Moreover, with inflation easing considerably from last year’s peak, consumers’ purchasing power erosion has slowed down. Cooling inflation is good news for discount retailers like WMT and PSMT.
Despite the challenging macroeconomic conditions, retail sales continue to rise. Retail sales in May rose 0.3% sequentially. According to the National Retail Federation, retail sales will grow between 4% and 6% in 2023 to reach between $5.13 trillion and $5.23 trillion.
WMT surpassed the consensus EPS and revenue estimates in the first quarter. Its EPS was 11.6% above the consensus estimate, while its revenue beat analyst estimates by 2.9%. Similarly, PSMT’s EPS topped the consensus estimate by 14.6%, while its revenue was 1.5% above analyst estimates.
WMT’s President and CEO Doug McMillon said, “We had a strong quarter. Comp sales were strong globally, with eCommerce up 26%. We leveraged expenses, expanded operating margin, and grew profit ahead of sales.” The company’s global advertising business grew over 30%, while its operating margin rose by 34 bps.
PSMT’s Interim CEO Robert E. Price said, “I want to begin by thanking our management team and all of our over 10,000 PriceSmart employees for their dedication and many contributions to our Company’s progress. Our financial results for the second quarter and first six months of fiscal 2023 have been highlighted by solid sales and earnings growth, improved inventory turns, and a strong balance sheet.”
“Our focus continues to be on the basics: inventory flow, in-stock position, new products, expenses, sales on PriceSmart.com, improvements to our warehouse club locations, identifying opportunities for new locations, and investing in efficiencies driven by improved processes and technology,” he added.
WMT expects its consolidated net sales for the second quarter to rise by approximately 4%, while its consolidated operating income is expected to decline by about 2%. Its adjusted EPS is expected to come between $1.63 and $1.68. Moreover, for fiscal 2024, its consolidated net sales are projected to rise by approximately 3.5%.
Its consolidated operating income for the year is expected to increase by approximately 4% to 4.5%. The company’s adjusted EPS is expected to come between $6.10 and $6.20.
As of February 28, 2023, PSMT had 50 warehouse clubs in operation, compared to 49 in the year-ago period. The company has purchased land and has planned to open its fourth warehouse club in El Salvador, Santa Ana. The club is anticipated to open in early 2024 and will become its 54th operational club. The company expects margin compression going forward compared to approximately 16% total gross margin during the first two quarters.
Regarding price performance, both WMT and PSMT have delivered positive returns in their recent history. WMT has gained 9.4% in price year-to-date, while PSMT has gained 20.9%. In addition, WMT has gained 9.3% over the past three months, while PSMT’s stock has gained 5.7%.
Let’s explore why both WMT and PSMT could be worth buying.
Recent Financial Results
WMT’s total revenues for the first quarter ended April 30, 2023, increased 7.6% year-over-year to $152.30 billion. Its net cash provided by operating activities came in at $4.63 billion, compared to net cash used in operating activities of $3.76 billion in the prior-year quarter. The company’s operating income rose 17.3% over the prior-year quarter to $6.24 billion.
In addition, its consolidated net income attributable to WMT came in at $1.67 billion. Also, its adjusted EPS came in at $1.47, representing an increase of 13.1% year-over-year.
For the fiscal second quarter ended February 28, 2023, PSMT’s total revenues increased 10% year-over-year to $1.14 billion. Its adjusted net income rose 22.5% over the prior-year quarter to $38.54 million. The company’s operating income increased 11.3% year-over-year to $53.80 million. Its adjusted EPS came in at $1.25, representing an increase of 21.4% year-over-year.
Expected Financial Performance
Analysts expect WMT’s EPS for fiscal 2024 to decline 0.9% year-over-year to $6.23. Its revenue for fiscal 2024 is expected to increase 4.7% year-over-year to $634.14 billion. Its EPS and revenue for fiscal 2025 are expected to increase 10.7% and 3.7% year-over-year to $6.90 and $657.84 billion, respectively.
For fiscal 2023 and 2024, PSMT’s EPS is expected to increase 9.9% and 10.1% year-over-year to $3.72 and $4.09. Its fiscal 2023 and 2024 revenue is expected to increase 7.8% and 8.1% year-over-year to $4.38 billion and $4.74 billion.
Profitability
WMT’s trailing-12-month revenue is 146.4 times what PSMT generates. WMT is more profitable, with a levered FCF margin and Return on Assets of 3.38% and 8.47%, compared to PSMT’s 3.14% and 6.84%, respectively. Also, WMT’s asset turnover of 2.53x compares to PSMT’s 2.32x.
Valuation
In terms of forward EV/Sales, WMT is currently trading at 0.76x, 49% higher than PSMT’s 0.51x. WMT’s forward EV/EBITDA ratio of 12.75x is 52.7% higher than PSMT’s 8.35x.
Thus, PSMT is relatively more affordable.
POWR Ratings
WMT has an overall rating of A, which equates to a Strong Buy in our proprietary POWR Ratings system. On the other hand, PSMT also has an overall rating of A, translating to a Strong Buy. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. WMT has a B grade for Quality, in sync with its high profitability. PSMT’s mixed profitability justifies its C grade for Quality.
WMT’s mixed valuation justifies its C grade for Value. On the other hand, PSMT has a B grade for Value, consistent with its discounted valuation.
Of the 38 stocks in the A-rated Grocery/Big Box Retailers industry, WMT is ranked #5, while PSMT is ranked #3 in the same industry.
Beyond what we’ve stated above, we have also rated both stocks for Growth, Momentum, Stability, and Sentiment. Click here to view WMT’s ratings. Get all the ratings of PSMT here.
The Winner
Consumer sentiment is holding up firmly thanks to easing inflation and the strong labor market. Moreover, given the chances of a recession, discount retailers will likely perform well as they offer essentials at discounted prices.
WMT and PSMT expect strong growth in their top and bottom line during the year. Given their low beta, strong fundamentals, and favorable analyst estimates, buying both WMT and PSMT could be wise.
Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Grocery/Big Box Retailers industry here.
What To Do Next?
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WMT shares were unchanged in premarket trading Tuesday. Year-to-date, WMT has gained 10.22%, versus a 13.85% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
Is PriceSmart (PSMT) a Better Buy than Walmart (WMT)? StockNews.com
