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Walmart’s Sales Spike Is a Bubble & That’s a Big Problem For The Dow

Last Updated September 23, 2020 1:48 PM
Francois Aure
Last Updated September 23, 2020 1:48 PM
  • Walmart stock surged on Friday as the company recorded huge sales in the first quarter.
  • Up 0.5% this year, WMT has comfortably outperformed the broader Dow Jones amid the stock market crash.
  • Unfortunately for Dow bulls, Walmart’s stunning sales are unlikely to continue.

Walmart (NYSE: WMT) stock has been an impressive performer in the Dow Jones, holding firm as most of its fellow members have crumbled. There was more good news on Friday, as the retail giant announced a stunning quarter, which saw in-store sales surge 17% and online revenues grow 31%.

Despite this, Walmart stock isn’t even outperforming cash, and there’s a big reason why.

Walmart Holds Firm While The Dow Jones Struggles

A coronavirus-fueled market crash has pummeled equities this year, pushing the Dow 26% lower year-to-date. Contrary to the performance of the broader stock market, Walmart has been a shining light, and is currently up 0.5%. Every other member of the Dow 30 is negative.

Dow Jones, Walmart, Stock Market
While the Dow Jones has fallen dramatically, Walmart stock is the only blue-chip stock in the green. | Source: Yahoo Finance 

The retail giant has even started extra-hiring as other industries collapse.

As a result, WMT has been a popular safe-haven play for investors looking to stay in stocks, as panic-buying has engulfed the United States.

Endless videos of massive lines and empty shelves have been making the rounds for some time, and the recent sales data appear to have confirmed that.

Walmart relies on the U.S. for 77% of its business, and as the world’s largest retailer, it’s recent sales boost of 17% in-store and 31% online is massive .

Unfortunately, some significant factors suggest this up-tick is unlikely to be sustained.

Soaring Unemployment & Struggling Households Are A Big Problem

First of all, unemployment is absolutely through the roof. Unemployment claims have risen by around 10 million  in the last two weeks as coronavirus devastated the labor market.

Yes, people will still need to eat, but they are unlikely to feel as comfortable loading up on supplies. Lower-income American’s have been disproportionately affected by the wave of layoffs , and they make up a considerable portion of Walmart’s sales.

A healthy consumer is good for WMT, and by all accounts, U.S. households are struggling.

Now to the supply side. By all accounts, there is no food shortage whatsoever. 

While people panic bought supplies in the initial wave of lockdowns around the country, the empty shelves are likely because people are buying food for two or three weeks, not one. There’s only so much people can spare for groceries each month, not to mention how much they’re able to store.

Such a dramatic surge in demand has a natural ceiling and barring a significant breakdown, the quantity of food is still ample, even if supply is slowing.

Further limiting the prospects for growth is the type of groceries being hoarded. Bloomberg recently discovered that it’s mainly long-term storable items , such as ramen noodles:

It’s a good time to be a ramen seller on Walmart Inc.’s website. Online sales of the pantry staple typically devoured by penny-pinching students rose 578% between Feb. 23 and March 21… Other categories seeing explosive growth online included shelf-stable milk, pasta, soup and canned vegetables, which all rose more than 400%.

These “haven” foods aren’t for immediate eating; they will be for storing. After the initial rush, supermarket life will return to normal (unless there is an actual shortage).

For evidence about the potentially transient nature of WMT’s earnings boom, taking a look at fellow Dow member, Walgreens, may be useful. The pharmacy store chain saw a big bump in its sales, but then saw a rapid deceleration .

Struggling Dow Needs Walmart Stock To Hold On

By no means does this mean that Walmart cannot continue to be one of the Dow’s better plays.

People are always going to need food, and cash-strapped shoppers might shun pricier stores like Vons or Trader Joe’s to save costs.

Unfortunately, the bigger macro trends of a weaker consumer and the deflation of the panic-buy bubble are far more powerful.

For this reason, the significant performance contrast between the Dow and WMT may narrow, and that could remove an important support from a rather shaky stock market.