Over the past six months, Walmart’s shares (currently trading at $109.90) have posted a disappointing 6.7% loss, well below the S&P 500’s 7.7% gain. This was partly driven by its softer quarterly results and might have investors contemplating their next move.

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Why Is Walmart Not Exciting?

Even with the cheaper entry price, we’re sitting this one out for now. Here are three reasons you should be careful with WMT, plus one stock we’d rather own.

1. Long-Term Revenue Growth Disappoints

A company’s long-term sales performance can indicate its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Regrettably, Walmart’s sales grew at a tepid 5.3% compounded annual growth rate over the last three years. This was below our standard for the consumer retail sector.

2. Low Gross Margin Reveals Weak Structural Profitability

At StockStory, we prefer high gross margin businesses because they indicate pricing power or differentiated products, giving the company a chance to generate higher operating profits.

Walmart has bad unit economics for a retailer, signaling it operates in a competitive market and lacks pricing power because its inventory is sold in many places. As you can see below, it averaged a 24.9% gross margin over the last two years. That means Walmart paid its suppliers a lot of money ($75.06 for every $100 in revenue) to run its business.

3. Weak Operating Margin Could Cause Trouble

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses — everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Walmart’s operating margin has generally stayed the same over the last 12 months, averaging 4.2% over the last two years. This profitability was lousy for a consumer retail business and caused by its suboptimal cost structure and low gross margin.

Final Judgment

Walmart isn’t a terrible business, but it doesn’t pass our bar. After the recent drawdown, the stock trades at 37.6× forward P/E (or $109.90 per share). At this valuation, there’s a lot of good news priced in - we think other companies feature superior fundamentals at the moment. We’d recommend looking at a dominant aerospace business that has perfected its M&A strategy.

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