Walmart Inc.

(New York Stock Exchange)
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Bullish +75

Hot Picks: Walmart, Costco and Chewy benefit from retail growth

AI-generated analysis

πŸ“ˆ Retail stocks are benefiting from resilient consumer spending despite inflation, geopolitical uncertainty, and higher gas prices.

πŸ’° Higher tax refunds in the U.S. this year were about 11% larger than last year, helping support retail demand.

🏒 Walmart is attracting more higher-income consumers and driving growth through its e-commerce, advertising, and subscription programs.

πŸ“Š Walmart's e-commerce business is growing at nearly 30% annually and became profitable last year after previously losing money.

πŸ”„ One-third of Walmart's operating income growth now comes from high-margin businesses like advertising and fulfillment.

πŸ›’ Costco continues to show strong comparable sales growth that outpaces rivals while expanding its warehouse footprint globally.

πŸ’Έ Costco is closing its valuation gap with Walmart and may issue another special cash dividend soon as its cash balance recovers.

🐾 Chewy is diversifying beyond pet supplies into higher-margin veterinary services and healthcare offerings.

πŸ€– Chewy is improving fulfillment efficiency through automation to support margin expansion.

🎯 All three companies are shifting toward high-margin revenue streams that position them for long-term earnings growth.

Bullish Signals
  • Walmart's e-commerce business became profitable last year after previously losing money, while growing at nearly a 30 per cent pace.
  • About one-third of Walmart's operating income growth is now coming from higher-margin businesses like advertising and subscriptions, driving overall margin expansion.
  • Costco's comparable sales growth is outpacing Walmart's, with the company expanding its warehouse footprint by opening approximately 25 to 30 new clubs each year.
  • Costco's cash balance has returned to levels seen before its last special cash dividend of $15 per share, suggesting another special dividend could be paid within the next year.
  • Chewy is successfully expanding into higher-margin veterinary services and other health-care businesses through new physical clinics in the United States.
  • Chewy continues to grow its active customer base while introducing automation into fulfillment centres to further improve margins.
  • Resilient consumer spending, supported by U.S. tax refunds that were about 11 per cent higher this year compared with last year, continues to fuel retail demand despite inflation and geopolitical uncertainty.
Risk Factors
  • The article mentions geopolitical uncertainty and higher gas prices as ongoing risks that continue to challenge retail demand, even if tax refunds have helped soften the blow.
  • Walmart's e-commerce business, while profitable now, previously lost money; the text notes it 'used to lose money' before becoming profitable last year, indicating a history of losses in this segment.
  • Costco's valuation gap relative to Walmart has narrowed significantly, which could lead to increased competitive pressure and potential margin erosion as valuations converge.
  • Chewy is expanding beyond its core pet supplies business into new areas like veterinary services, which introduces execution risk and capital expenditure pressures that could impact current margins if not managed effectively.
Full Analysis
BNN Bloomberg interviewed Arun Sundaram, senior vice president at CFRA Research, who identified Walmart, Costco, and Chewy as top retail picks for the coming year due to their strategic shifts toward higher-margin revenue streams. Sundaram highlighted that despite inflationary pressures and geopolitical uncertainty, consumer spending remains resilient in the U.S., partially supported by tax refunds that were approximately 11 percent higher than the previous year. He noted that general merchandise and discretionary categories at retailers are performing well alongside staple goods, indicating broad-based demand strength even with higher gas prices. Walmart is favored for its evolving business model, which now generates significant profit from advertising, subscription services like Walmart+, and fulfillment operations rather than just selling physical goods. The interviewee pointed out that Walmart's e-commerce business grew at nearly a 30 percent pace in recent quarters and became profitable last year after previously losing money. Currently, about one-third of Walmart's operating income growth is driven by these high-margin ventures, suggesting potential for further margin expansion as higher-income consumers adopt subscription programs. Costco continues to be a strong choice due to its superior comparable sales growth relative to peers and its ability to expand its warehouse footprint globally with plans to open 25 to 30 new clubs annually. The analyst noted that Costco's valuation gap against Walmart has narrowed significantly, making it more attractive than in the past. Additionally, with cash balances reaching levels seen after a recent $15 per share special dividend, there is an expectation that Costco may issue another special cash dividend within the next year or so to shareholders. Chewy Inc. was selected as a top pick for its dominance in pet e-commerce and successful diversification into higher-margin veterinary services and health-care solutions through new physical clinics. The company is also implementing automation in its fulfillment centers to improve efficiency and expand margins while growing its active customer base at a low-single-digit rate. Overall, the report underscores that retailers with diversified high-margin businesses are better positioned for long-term earnings growth as they capitalize on resilient consumer spending and operational improvements.