Navigating the Grocery Sector: Walmart (WMT) and Dollar General (DG) – Buy, Hold, or Sell?

The grocery industry is experiencing growth due to its low susceptibility to market volatility and its adoption of digitization to expand operations. Against this backdrop, let’s analyze which grocery stock among Dollar General (DG) and Walmart (WMT) could be worth buying. Keep reading…

Despite macroeconomic uncertainties, the grocery industry thrives because of its inherent stability. The consistent demand for essential food items ensures a reliable and steady revenue stream for the companies operating in this industry.

Considering these factors, it could be wise to buy fundamentally strong grocery stock Walmart Inc. (WMT). On the other hand, it could be wise to hold Dollar General Corporation (DG), given its uncertain outlook.

Before diving deeper into the fundamentals of these stocks, let’s discuss why the grocery industry is well-positioned for growth.

According to Coresight Research, the U.S. grocery sector is expected to grow by 5.6% in 2023, reaching $1.50 trillion. This growth is attributed to factors like reduced inflation rates and the rising importance of non-traditional grocery retailers.

The grocery industry is evolving due to increased spending, growing online sales, and changing consumer preferences. The pandemic led to more at-home cooking. New delivery methods, food staples, and personalized experiences are shaping the industry's future.

The global food and grocery retail market, valued at $11.32 trillion in 2021, is expected to grow at a 3% CAGR from 2022 to 2030.

Also, notably, big-box grocery retailers thrive during economic uncertainty due to essential items. The retail sector remains strong, driven by e-commerce growth and technological advancements, amplified by the pandemic.

Considering these conducive trends, let’s take a look at the fundamentals of the two above-mentioned Grocery/Big Box Retailers stocks.

Stock to Hold:

Stock #2: Dollar General Corporation (DG)

DG is a discount retailer that provides various merchandise products in the southern, southwestern, midwestern, and eastern United States. It offers consumable products, cleaning products, paper dinnerware, trash and storage bags, disinfectants, laundry products, packaged food, fruits and vegetables, perishables, refrigerated and frozen food, beer, and wine.

In terms of the trailing-12-month net income margin, DG’s 5.59% is 28.7% higher than the 4.34% industry average. Its 34.73% trailing-12-month Return on Common Equity is 197.4% higher than the 11.68% industry average. However, its 10.02% trailing-12-month EBITDA margin is 12.6% lower than the industry average of 11.47%.

DG’s net sales for the second quarter that ended August 4, 2023, increased 3.9% year-over-year to $9.80 billion. However, its operating profit decreased 24.2% year-over-year to $692.31 million. The company’s net income and EPS decreased 30.9% and 28.5% year-over-year to $468.84 million and $2.13, respectively.

Street expects DG’s EPS for the quarter ending October 31, 2023, to decrease 47.6% year-over-year to $1.22. Whereas its revenue for the same quarter is expected to increase 1.9% year-over-year to $9.65 billion. Over the past month, the stock has declined 1.8% to close the last trading session at $113.57.

DG’s POWR Ratings reflect an uncertain outlook. It has an overall C rating that translates to Neutral in our proprietary system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

It has a C grade for Value, Momentum, Stability, and Quality. It is ranked #36 out of 38 stocks in the A-rated Grocery/Big Box Retailers industry. To access DG’s ratings for Growth and Sentiment, click here.

Stock to Buy:

Stock #1: Walmart Inc. (WMT)

WMT engages in the operation of retail, wholesale, and other units worldwide. The company operates through three segments: Walmart U.S., Walmart International, and Sam's Club. It operates supercenters, supermarkets, hypermarkets, warehouse clubs, cash and carry stores, discount stores, membership-only warehouse clubs, e-commerce websites, and mobile commerce applications.

On October 11, WMT announced the opening of an owned and operated milk processing facility in Valdosta, Georgia, which will create jobs, enhance milk supply chain resilience, and provide high-quality milk products to WMT and Sam's Club stores in the Southeast.

On October 6, WMT announced the launch and testing of various tech-powered experiences, including GenAI-powered search, voice shopping, AR + GenAI shopping, and virtual commerce, to enhance the shopping experience and meet customer needs more effectively.

In terms of the trailing-12-month Return on Common Equity, WMT’s 17.87% is 53% higher than the 11.68% industry average. Its 10.60% trailing-12-month Return on Total Capital is 61.2% higher than the 6.58% industry average. Likewise, its 2.51x trailing-12-month asset turnover ratio is 193% higher than the industry average of 0.86x.

WMT’s total revenues for the second quarter ended July 31, 2023, increased 5.7% year-over-year to $161.63 billion. Its operating income rose 6.7% year-over-year to $7.32 billion. In addition, the company’s net income attributable to WMT and net income per share attributable to WMT rose 53.3% and 55.3% year-over-year to $7.89 billion and $2.92, respectively.

Analysts expect WMT’s EPS and revenue for the quarter ending October 31, 2023, to increase 0.6% and 4.5% year-over-year to $1.51 and $158.28 billion, respectively. It surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past year, the stock has gained 23.6% to close the last trading session at $161.21.

It’s no surprise that WMT has an overall rating of A, which translates to a Strong Buy in our proprietary POWR Ratings system.

It has an A grade for Stability and a B for Growth, Sentiment, and Quality. Within the Grocery/Big Box Retailers industry, it is ranked #4 out of 38 stocks. To see WMT’s Value and Momentum ratings, click here.

What To Do Next?

43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.

2024 Stock Market Outlook >

WMT shares were trading at $161.46 per share on Tuesday afternoon, up $0.25 (+0.16%). Year-to-date, WMT has gained 15.18%, versus a 15.74% rise in the benchmark S&P 500 index during the same period.

About the Author: Abhishek Bhuyan

Abhishek embarked on his professional journey as a financial journalist due to his keen interest in discerning the fundamental factors that influence the future performance of financial instruments.


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