We believe that Dollar General stock (NYSE: DG), Ollie’s Bargain Outlet Holdings stock (NASDAQ: OLLI), and BJ’s Wholesale Club Holdings stock (NYSE: BJ) are currently better valued than Walmart’s stock (NYSE: WMT). Walmart’s current price-to-operating income ratio of 21x is higher than levels of 14x for DG, 13x for OLLI, and 12x for BJ’s. But does this gap in valuation make sense? We don’t think so, especially if we look at the fundamentals. More specifically, we arrive at our conclusion by looking at historical trends in revenues and operating income for these companies. Our dashboard Better Bet Than WMT: Pay Less To Get More From Industry Peers DG, OLLI, BJ has more details – parts of which are summarized below.
1. Revenue Growth
Walmart’s Revenues grew at an average rate of around 4% over the last three years, as compared to a growth of 13% for Dollar General Revenues, 19% for Ollie’s Bargain Outlet Revenues, and 8% growth for BJ’s Wholesale Club Revenues. Even if we look at the revenue growth over the last twelve-month period, WMT’s growth of nearly 4% is much worse than 8% growth for DG, 33% rise for OLLI, and 9% rise for BJ.
- Dollar General is the largest small format retailer in the U.S. by store count. In spite of its name, it sells merchandise of prices up to $10. In Q2, same-store sales fell 5% but were up 14.1% on a two-year basis. The company focuses on rural and semi-urban markets with smaller stores. In fact, DG’s business model is well-suited to both good and challenging economic conditions as the company saw its 31st consecutive year comps growth in 2020.
- Ollie’s Bargain Outlet Holdings is a discount retail chain selling both staples and discretionary items (toys, home goods, electronics, hardware). The company seeks out excess inventory from suppliers to be sold at a substantially discounted price in warehouse-like stores. It specifically targets brand-name merchandise while purchasing the inventory. In the fiscal second quarter (ended July 31), comparable store sales decreased 28.0% from the prior year’s extraordinary 43.3%, but resulting in a two-year stack of positive 15.3%.
- BJ’s Wholesale Club is a membership-only warehouse club chain in the U.S. The company is a more attractive business currently than it was before the pandemic struck. While BJ’s comparable sales were down 3% excluding gasoline price shifts, it grew 21% on a two-year basis. It should be noted that Walmart’s Sam’s Club comp sales saw a 14.5% growth compared to the pre-pandemic quarter.
- Walmart is the world’s largest retailer, operating discount stores, supercenters, neighborhood markets, and Sam’s Club warehouses. The company’s revenues grew 2% y-o-y, on the back of U.S. comparable sales rising 5.2% during the quarter. It should be noted that this 5% comps growth in Q2 decelerated from 6% in Q1 and 9% in the prior fiscal year, but was still higher than the 3% growth the company enjoyed two years ago in the pre-pandemic quarter.
2. Operating Income Growth
The three-year average operating income growth for WMT stands at 16%, much lower than 23% for Dollar General, 29% for Ollie’s, and 46% for BJ’s Wholesale. Better revenue growth for the latter three led to higher operating income for these companies. Looking at the last twelve-month period, WMT’s 31% drop in operating income compares with 9%, 76%, and 28% gains for DG, OLLI, and BJ, respectively.
The Net of It All
Although WMT’s revenue base is much larger than all its peers, each of these companies has seen higher growth in revenues and operating income than WMT in the last twelve months, as well as the last three years. Despite better profit and revenue growth, these companies have a comparatively lower market cap-to-operating income ratio. Walmart’s underperformance in revenue and operating income growth compared to the mentioned industry peers reinforces our conclusion that the stock is expensive compared to its peers. And, we think this gap in valuation will eventually narrow over time to favor the group of comparatively less expensive names – Dollar General, Ollie’s Bargain Outlet, and BJ’s Wholesale Club.
WMT Stock Comparison With Peers shows how it compares against other peers on metrics that matter.