Better Buy: Walmart vs. Wayfair
There are bullish cases to be made for both names, albeit very different ones. Betting on Wayfair (W -0.39%) is a long shot with a big payoff, while owning Walmart (WMT 0.48%) offers predictability at the expense of big gains. Most portfolios have room for both kinds of trades.
If there’s only room for one for one of these consumer-facing stocks in your portfolio right now, though, Walmart’s the better pick of the two for one overarching reason.
Why Walmart?
Walmart is, of course, the world’s biggest brick-and-mortar retailer, managing more than 10,000 locations in 24 different countries. The organization has done almost £420 billion worth of business through the first three quarters of the current fiscal year, and is on pace to drive nearly £160 billion in sales for the fourth fiscal quarter now underway. Walmart says 90% of the U.S. population lives within 10 miles of one of its stores.
Simply put, its reach is enormous. This deep reach, however, isn’t necessarily a shield from the forces working against all retailers right now. That’s inflation, mostly.
While last quarter’s top line was up almost 9% year over year (and nearly 10% on a constant-currency basis), operating income only improved to the tune of 4.6% thanks to soaring merchandise and operating costs. The quarter’s numbers reflect the profit margin pressure the retailer’s been facing since the latter part of last year. Inflation is expected to be curbed in the coming year, but costs aren’t projected to fall.
In the meantime, this year’s holiday spending projections are a mixed bag although the analyst community estimates Walmart will see slowing revenue growth of 4.1% for the three-month stretch ending in January. Translation: While things could be worse, they could also be — and have been — better. The thing is, Walmart’s third-quarter report verified its resiliency even in tough environments.
Profits are under pressure, to be sure, but are seemingly more so for its rivals. Target, for instance, is planning to cull between £2 billion to £3 billion worth of spending by 2025 — a move that Walmart isn’t feeling forced to mirror. Instead, Walmart is pushing back on its suppliers, telling them to lower their costs if they want to continue wholesaling to the massive retailer. Although the company still has to fight through the current headwind, it could conceivably win market share by remaining able to offer good value during this turbulent period.
It could come out of this slow time even stronger than it was going into it.
Why not Wayfair?
Home goods retailer Wayfair, on the other hand, is a different story. To its credit, the e-commerce outfit topped last quarter’s revenue estimates and at least matched most of its earnings estimates. It’s a dubious victory, however.
Revenue still fell 9% year over year, and its operating loss expanded from a loss of £70 million in the third quarter of 2021 to a loss of £372 million this time around. Free cash flow remained in the red as well, growing from a negative £205 million in Q3 of last year to a negative £538 million in the third quarter of this year. The company’s got a plan.
Wayfair CEO Niraj Shah says he sees £500 million worth of annual expenses that will be readily culled by the end of 2023 although he’s also looking to shed an unspecified amount of expenses above and beyond that, even if they’re a bit trickier to spot. It’s a smart move for any company that can’t seem to get out of the red. What’s missing from the plan, however, is an explanation of why this spending can be cut now but couldn’t be culled at any point since Wayfair’s launch back in 2011.
It’s possible this effort to cut costs may well accidentally undermine what’s actually driving consumers to the home goods shopping site and then prompting them to make a purchase. After more than a decade’s worth of effort, it’s also possible that Wayfair’s ever-growing losses (except during the throes of the pandemic, when hordes of consumers were fixing up their homes) are an indication that the business model just doesn’t work as-is.
W Net Income (Quarterly) data by YCharts
In an e-commerce arena where both Walmart and Amazon are also players, that possibility certainly holds some water.
Neither or both are also options, but…
None of this is to suggest Walmart is bulletproof. Nor is it to say Wayfair is doomed. The former is still sitting on too much inventory, and the latter — as an e-commerce outfit — may simply need more scale to move out of the red and into the black.
Wayfair’s high-risk, high-reward proposition may be what some investors are looking for, while Walmart’s single-digit growth isn’t everyone’s cup of tea either. There’s a case to be made for buying both, or neither, depending on your time frame and risk tolerances. For most investors, though, Wayfair’s risk is too great despite the scope of its potential turnaround, while Walmart’s consistency and certainty is a fair trade-off for single-digit growth.
That said, don’t think for a minute that Walmart stock’s modest long-term performance tells the whole bullish story. Although the current dividend yield of 1.5% is merely average, it’s a dividend that’s been raised for 49 straight years now. In the meantime, the company just authorized a £20 billion stock buyback program, renewing a long history of share repurchases that add value in an indirect way.
The point is, a look at the bigger picture here firmly bolsters the bullish case for owning Walmart rather than Wayfair. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Target, and Walmart Inc.
The Motley Fool recommends Wayfair.
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