New Heights for Walmart: Chinese Consumption Stronger than American

After Ai Technology stocks led the Nasdaq to new highs, leading companies in traditional industries also took the baton, pushing the Dow Jones to new highs. Among them, the stock contributing the most to the Dow Jones Index is Walmart. Unknowingly, the two retail giants, Walmart and Costco, have also seen their stock prices rise by over 30% this year. In the past two months, these two have been the best-performing large-cap blue-chip stocks, surprising many. Despite the talk of high inflation pressure and consumer stress, these two, who do business at fair prices, have benefited from it. The main manifestation of consumer downgrading is reducing expenses and doing things themselves. By shifting from high-end to low-end, both companies meet the requirement of structuring the lowest cost of living. With the latest positive performance, it is not surprising that their stock prices have been active. However, behind this financial report, there are also a few hidden economic clues.

1. Moderate Growth, but Expectations are Improving From a valuation perspective, Walmart is difficult to justify because in Q2, the growth rate doesn't look too good, with a growth rate of around 5%. It has decreased compared to the previous quarter, but compared to the overall US stock market, it is considered average. This growth rate, combined with Walmart's currently high valuation, reaching nearly 40 times PE, is indeed somewhat difficult to understand. The highlight may lie in the improvement of profit margins, with a gross profit margin of 24.4% in Q2, a new high in recent quarters. The company also mentioned that the company's price gap competitiveness and e-commerce have improved the gross profit margin, reflecting to some extent that in the economic downturn, the frugal lifestyle supported by these large retailers is more favored. In this quarter, operating profit also hit a new high for a single quarter in history.

On the other hand, the company's expectations for the remaining quarters are not high, but they have raised the full-year expectations, with EPS expected to grow by 5.8%-9.4%. This basically means that the performance in the second half of the year is unlikely to decline, at least remaining flat or even slightly improving. In the entire sluggish US consumer market, with multiple major consumer stocks like Nike and Lululemon being hit hard, this counter-trend performance holds significant value.

As for comparison, the financial report of the biggest competitor, Costco, has not been released yet. For over a decade, Walmart's growth rate and stock price have been overshadowed by Costco, which is unlikely to change, but the valuation gap between the two has already been offset.

And as for other supermarket retailers, Both Costco and Walmart outperformed, becoming the only supermarkets with continuously record-breaking profits in the second quarter. Looking at them one by one, Kroger's first-quarter growth rate was only 1%, with profits declining year-on-year. Target is still struggling in the negative growth range. In the process of inventory clearance, it has started to recover from the low base effect after the 2023 explosion, showing very good net profit growth data. This turnaround in adversity has also brought about a good stock price performance. However, this does not necessarily indicate the company's competitiveness, as Target's profits are still far below their peak, as is the stock price. As for the much-talked-about Dollar General and Dollar Tree, they are close to halving their performance this year, with revenue performance being average and profits taking a big hit. Some say this is due to the impact of TEMU, which is labeled as a 1-yuan store. However, in reality, the company's actual model is a community supermarket, an intermediary between large supermarkets and convenience stores, with an average size of 700 square meters, mainly selling daily groceries and fast-moving consumer goods, with the advantage of prime locations. As TEMU rises, others fall, coupled with the old-fashioned concept of the 1-yuan store, creating the illusion that business is being snatched by Pinduoduo. However, TEMU does not sell any fresh food or many branded daily necessities, so there is hardly any conflict between the two. The company's lost performance is not flowing to TEMU, but rather to Walmart and Costco. In an economic downturn environment, the long-distance, bulk purchase model is more easily accepted, as people are willing to travel a bit further to buy cheaper goods. When comparing product prices, convenience stores are definitely higher than large supermarkets, which is common knowledge Of course, the most important factor affecting performance is not competition, but social unrest. The company mentioned that a significant factor causing profit decline is theft. Small stores (steal and leave quickly), selling single items, being close to the community, are all prime targets for zero-cost purchases. Like Costco, with tens of thousands of square meters, membership fees, and large packaging, adding more items makes it unsustainable, and no one wants to come here for free shopping. The new high in quarterly performance, the expectation of slight growth in subsequent quarters, completely withstands the headwinds of the economy, causing Walmart's stock price to rise again. However, a valuation of 40 times earnings is still unreasonable. It has risen by 30% this year, with EPS growth of only 10%, most of which is due to valuation. It can be understood that the bubble in the US stock market has shifted its advantages to other industries without bursting. Walmart is good, but with this growth rate and profit margin, there is no reason to support a valuation surpassing historical highs. II. Where do competitors lose? Looking at the performance of the entire US retail industry, it can be seen that social factors unexpectedly affect company performance. Factors such as large stores and location have helped Costco and Walmart to some extent. The impact of zero-cost purchases on performance is indeed ridiculous. This thing cannot be put on the table, completely exposing the ugly side of public security in the US, and truly reflecting the plight of the poor under the prosperity of the US stock market. Currently, all retailers in the US are considering reducing unmanned self-checkout machines and using more manual checkout to prevent theft. AI has enriched capital and impoverished the masses, leading to a high crime rate. Existing AI identification automation machines are no longer feasible due to the high crime rate and will be abandoned. It is a perfect closed loop. Returning to Walmart's performance, the company actually made it very clear: price competitiveness. The worse the economy, the more it benefits. There is a slight difference in profit margins, but it still does not fully reflect the situation From a price perspective, Walmart is basically the lowest, comparable to Costco, but the two have different models. Costco is almost the retailer with the lowest gross margin, mainly earning membership fees, and products are sold close to cost. Therefore, the profit margin is also low, and the profit margin reflects the price of goods. Costco is the most stable and highest valued retail stock in the long term. In the retail industry, a low profit margin is a moat and also long-term growth potential. Behind a high profit margin is a high markup rate, which inevitably leads to a competitive disadvantage. The premium of community convenience ultimately cannot compete with cheap prices in times of economic downturn. After all, seeing the profit margins of Dollar General, they are a bit high. Target's strategy of high-end branded products is popular in times of economic prosperity, but it hurts when it falls. The question that needs to be defined is whether a high profit margin is an advantage or a disadvantage? This involves comparing business models. If two companies have the same model, the same product pricing, and Company A has a higher profit margin than Company B, then obviously we can consider Company A to be better, and the difference here lies in operational efficiency. For example, Kroger and Walmart are similar models, both are non-membership large supermarkets, and they are also the most penetrated retail models in the United States. A higher proportion of fresh food increases Kroger's operating costs, leading to less overall price competitiveness than Walmart in the non-membership large supermarket track. Many consumers have also switched from Kroger to Walmart recently because they think Walmart is more cost-effective. Walmart's profit margin is higher than Kroger's at this time, which is an operational advantage. Therefore, retail profit margins need to be evaluated comprehensively based on business models, selling prices, and operational efficiency. Pinduoduo and Alibaba are a good example. In the past, Pinduoduo had a lower profit margin than Taobao, and its products were cheaper. Pinduoduo's model is similar to Alibaba's but has simplified many things, providing a better shopping experience, which has driven Pinduoduo's market share growth. When the prices of the two are similar, the models also tend to converge. Pinduoduo's profit margin exceeds Taobao's, which fully reflects Pinduoduo's operational efficiency advantage, making it the most glorious time for Pinduoduo. Now, Pinduoduo's profit margin far exceeds Taobao's (mainly due to Taobao's declining profit margin), but is the difference in operational efficiency between the two even greater? In fact, it is not. Alibaba is also adjusting its structure to streamline expenses. Alibaba is actively reducing profits to organize new battles and rebuild price advantages. Therefore, this trend of profits is the beginning of a tough time for Pinduoduo, and focusing on Pinduoduo's industry-leading profit margin as a big positive is not advisable. Returning to U.S. retail companies, Walmart competes with Costco through its subsidiary Sam's Club, and its long-term performance has always been inferior to Costco. Comparing profit margins, the logic is similarly applicable. Sam's Club's operating profit margin in the United States is only 3%, lower than Walmart's overall, while Costco's operating profit margin can reach 4%. When there is no difference in models between the two, whoever makes money at this time is the winner. ! Three, China Business Exceeding Expectations? Walmart's financial report mentioned that the growth rate of its business in China is the fastest at 17%, which is the highest, while the growth rate in the United States is only 5%. Who is not consuming well? For Walmart as a whole, revenue from the Chinese region accounts for only 3% of the total revenue, which is not a focus. However, it is important for investors to understand this phenomenon.

The reason behind this is the transformation into Sam's Club. Walmart, which was originally the leader in supermarkets, closed many regular stores and converted them into Sam's Club, finally catching up with the growth of social retailing. While the overall collapse of the Chinese supermarket industry is not due to JD or Alibaba, which have been thriving in e-commerce for 10 years, they are still doing well. It all collapsed after the epidemic. The main reason is the combined impact of instant front warehouses (Meituan, Pinduoduo) + community group buying (Meituan, Pinduoduo). The epidemic catalyzed their growth, and traditional supermarkets with huge rental costs simply couldn't withstand it. Competing on prices, delivery efficiency, inventory management, and traffic entry, traditional supermarkets all lost. Traditional supermarkets focus on transactional fulfillment by competing on price and quality. However, after instant front warehouses and community group buying fully took over this function, will traditional supermarkets disappear completely? Not necessarily. Shopping is not just about buying things; many people see shopping as entertainment, not just a quick transaction. By maximizing elements such as tasting, experiencing new products instantly, etc., creating an experiential entertainment venue rather than a shopping destination. Coupled with the differentiation strategy of foreign brands that Chinese people particularly like, those who admire foreign brands are many. In the end, Walmart fully enjoyed the dividends of this wave of new supermarket transformation. It already had the Sam's Club format, which was well established. Few domestic companies understand how to play the membership system, free brands, and experiential feeling. Domestic supermarket company Pinduoduo, known for its experiential feeling, is also one of the beneficiaries of this dividend. This also illustrates the blue ocean status of China's new supermarket industry, which is also a new form of consumption. Costco also realized the opportunity and started entering China. Even with the opponent Sam's Club, which is easily handled in its home country, expanding into the Chinese market is highly anticipated. However, Costco China encountered setbacks, with expansion and same-store growth relatively poor compared to Sam's Club. The key lies in the supply chain. Costco's past operational efficiency advantage lies in its leading network for selecting high-quality Asian products for import, the logistics network for American local agricultural products, and the network coverage of the American community population Currently, Costco's three points in China have all failed and need to reorganize the supply chain in China, which is equivalent to starting over. Sam's Club has strategic inefficiencies compared to Costco, but Walmart has had a mature local supply chain in China for decades. Sam's Club and Walmart in China almost share the same supply chain. Therefore, Sam's Club has formed a relative operational advantage over Costco in China, with similar quality but more affordable prices. This also reflects the importance of market insights. Chinese consumption is not as bad as it seems, there needs to be a shift in mindset, providing emotional value, and telling new stories. The fact is, most of the suppliers for Walmart in China are the same as Sam's Club, with Walmart offering cheaper prices and Sam's Club adding an extra "mm" to the price. People are willing to pay a membership fee, take the risk of not finishing their purchases for a few days, and spend more money just to gain a sense of middle-class identity and tasting experience. If Sam's Club truly offered great value for money, then why would the fee-free Sam's Club (Walmart China) be struggling and closing stores every day? Looking at Walmart's performance, Chinese consumption seems better than in the United States, where Chinese people are willing to pay for shopping experiences while Americans expect experiences for free. Conclusion However, consumer behavior in China and the United States cannot be solely judged based on the supermarket retail industry; it is necessary to consider consumption in more categories. The financial data mentioned above is completely objective and real. Both Chinese and American consumption deviate from expectations in certain aspects. It is also evident that U.S. retail stocks have consistently high valuations, with leading companies commanding astonishing premiums. In years when Walmart is not overvalued, it still maintains an average PE ratio of 30 times due to its low-price model, pricing flexibility, ability to keep up with the economy, and benefiting rather than being impacted during economic downturns. The valuation of China's retail industry is generally lower, except for Sam's Club. Internet companies have almost completely taken over traditional supermarkets, placing the Chinese retail industry in an unprecedented state of monopoly, while the competition between Meituan-Dianping, Pinduoduo, and JD.com is becoming more stable. In the U.S. stock market's supermarket retail industry, there are still more than four giants. However, each domestic company has a valuation of less than 20 times, indicating that the market has yet to fully recognize the stability and countercyclicality of retail stocks.

In conclusion, Walmart's data on Chinese consumption provides some confidence that the real consumption potential is not as bad as it seems. The most important thing to consider now is which Chinese retail companies will be in the position of Amazon, Walmart, and Costco in the future