Walmart Added to BofA US-1 List; Costco is Removed

Bank of America (BofA) has made a significant update to its US-1 list, adding Walmart and removing Costco. The analysts at BofA highlighted Walmart's robust market performance, with share gains and growth in its profitable ancillary businesses, as well as enhancements in its e-commerce capabilities.

BofA's analysts observed that Walmart is experiencing broad share gains across various product categories and consumer income levels, particularly among higher-income shoppers. They noted that Walmart's omni-channel strategy—comprised of expanded online services, store remodels, and the growth of the Walmart+ membership—is effectively strengthening its market position.

With the holiday season approaching, BofA believes that Walmart's digital resources will excel, fueled by increased online shopping. Additionally, the company's expanding digital advertising segment has contributed positively to its profit margins, offering a significant boost.

According to BofA, "We see continued gross margin expansion for WMT as growth in higher-margin ancillary businesses (which represented approximately half of a $500 million year-over-year EBIT increase in the third fiscal quarter and now account for about one-third of total EBIT), including digital advertising, 3P marketplace fees, and fulfillment services, counterbalances sales mix challenges as general merchandise underperforms compared to lower-margin grocery and health/wellness sectors."

Walmart has also made progress in reducing its U.S. e-commerce losses, with delivery costs per order decreasing by 40% year-over-year. Although Walmart's current earnings valuation ranges from 33 to 34 times, which surpasses its historical averages, BofA analysts assert that these changes warrant such a premium.

They anticipate that Walmart's advancements in digital services and profit margins will enable continued profitability and possible valuation growth.

On the other hand, BofA maintains that Costco is still a strong performer but is encountering obstacles related to challenging year-over-year comparisons, competitive reactions in the market, and limited earnings per share increases following a recent membership fee hike. With Costco's price-to-earnings ratio currently at a historical peak of around 50 times, BofA believes there is less potential for further growth in its valuation when compared to Walmart.

Walmart, Costco, BofA