Price Investments At Bodega And Sam's Club Will Boost Traffic And Market Share

Key Takeaways

• Strategic price investments and leveraging digital ecosystems like Walmex One aim to enhance market share and revenue growth amidst economic challenges.
  
• Growth in advertising through Walmart Connect and operational efficiencies via technology investments are set to boost profitability and expand market presence.
  
• Increased promotional and pricing efforts may reduce short-term profitability amid economic challenges and dependency on new ventures, compounded by rising labor and inventory costs.

Catalysts

Owns and operates self-service stores in Mexico and Central America.

• Wal-Mart de México is focusing on strategic price investments across formats like Bodega and Sam's Club to navigate economic headwinds and gain market share, which is expected to boost traffic and revenue growth.
  
• The integration and leveraging of the Walmex One ecosystem, including initiatives like the “Beneficios” program, are anticipated to improve customer insights and engagement, leading to increased market share and revenue over time.
  
• New business growth, particularly in advertising through Walmart Connect, is poised to enhance gross margins over the next five years as it scales and capitalizes on digital opportunities, contributing significantly to profitability.
  
• Investments in technology and automation, such as the development of new automated distribution centers, are expected to drive operational efficiencies and reduce costs, positively impacting net margins in the long term.
  
• The company plans to accelerate new store openings and enhance existing ones, with a focus on automation and remodeling to maintain competitive positioning, which is likely to expand their market footprint and increase revenues.

Wal-Mart de México. de Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Wal-Mart de México. de's revenue will grow by 7.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.6% today to 5.7% in 3 years time.
• Analysts expect earnings to reach MX$69.1 billion (and earnings per share of MX$4.02) by about March 2028, up from MX$53.8 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting MX$77.8 billion in earnings, and the most bearish expecting MX$61.8 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 25.7x on those 2028 earnings, up from 17.8x today. This future PE is greater than the current PE for the MX Consumer Retailing industry at 16.1x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.72%, as per the Simply Wall St company report.

Wal-Mart de México. de Future Earnings Per Share Growth

Risks

• Increased promotional activity and price investments to counter competitive pressures may affect net margins, reducing profitability in the short term.
  
• Softness in consumption and economic headwinds have prompted price investments, potentially impacting revenue growth if such conditions persist.
  
• High reliance on the performance of new businesses like Bait and Walmart Connect for gross margin contributions makes earnings susceptible if these ventures underperform.
  
• Rising labor costs due to minimum wage increases could lead to higher operating expenses, impacting net margin if not offset by efficiency improvements.
  
• Unexpected fluctuations in inventory levels, particularly in general merchandise and food categories, could affect cash flow and gross margins if not adequately managed.

Valuation

• The analysts have a consensus price target of MX$69.372 for Wal-Mart de México. de based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of MX$81.0, and the most bearish reporting a price target of just MX$62.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be MX$1203.7 billion, earnings will come to MX$69.1 billion, and it would be trading on a PE ratio of 25.7x, assuming you use a discount rate of 13.7%.
• Given the current share price of MX$54.95, the analyst price target of MX$69.37 is 20.8% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.