In a trade war, Walmart is at a disadvantage compared to Amazon
Two prominent American retailers are at the forefront of President Trump’s trade conflict. Investors appear to be wagering that Walmart can evade a greater number of challenges than Amazon.Walmart utilized its fiscal first-quarter report on Thursday to indicate that its prices are set to increase as products affected by new tariffs begin to appear on its shelves. The report, while strong overall, was somewhat tarnished by this issue, as revenue increased nearly 3% compared to the same period last year, and operating earnings surpassed Wall Street’s expectations. Wall Street appears to exhibit a notable lack of concern. Walmart experienced a significant decline in its stock price Thursday morning, yet it swiftly rebounded. The stock has increased nearly 2% following the earnings report, resulting in an approximate 53% rise over the past year—significantly outperforming other retailers and surpassing Amazon’s 12% increase during the same timeframe.
Walmart, known for its “Always Low Prices,” has achieved a substantial multiple of 37 times projected earnings for the upcoming four quarters, reflecting a 40% increase over its three-year average, as indicated by FactSet data. Amazon currently has a forward earnings multiple of approximately 33 times. This premium affords Walmart minimal margin for error in an environment fraught with potential pitfalls. Walmart indicated on Thursday that over two-thirds of the merchandise available in its U.S. stores is sourced domestically. “But given the magnitude of the tariffs, even at the reduced levels announced this week, we aren’t able to absorb all the pressure given the reality of narrow retail margins,” stated Walmart Chief Executive Doug McMillon during the company’s earnings call.
“Narrow retail margins” present a challenge for Amazon as well. However, the company has invested considerable time in developing ancillary and adjacent businesses, including cloud computing and advertising, which offer significantly greater financial leverage. This is evident in the income statements of the companies. Amazon and Walmart exhibited comparable gross margins in the mid-20% range just over ten years ago, as indicated by data from S&P Global Market Intelligence. Walmart has maintained its position within that range, whereas Amazon’s annual gross margin has almost doubled, reaching 49% in the previous year.
Walmart has effectively transformed itself into more than merely a vast physical retailer. E-commerce revenue reached $32.5 billion in the quarter ending in April, reflecting a 22% increase compared to the same period last year, and now constitutes 20% of the company’s overall sales. This has enabled Walmart to emulate Amazon’s strategy and develop new, higher-margin revenue sources through subscriber fees and advertising. According to Bernstein analyst Zhihan Ma, Walmart is positioned on a “fundamentally improved” earnings trajectory in the long term.
However, Amazon has progressed significantly further along that trajectory. It is noteworthy that both companies are anticipated to achieve approximately $700 billion in revenue this year; however, projections indicate that Amazon’s operating income is expected to be about 2½ times greater than that of Walmart, exceeding $77 billion for Amazon, based on estimates from FactSet. Even after accounting for the expenses associated with Amazon’s robust investments in artificial intelligence and the initiation of its own satellite network. These enterprises are less correlated with the broader retail landscape compared to Walmart’s supplementary operations like advertising, positioning them as a more effective safeguard against tariff volatility.
Walmart’s extensive scale and operational execution provide it with a significant competitive advantage over other conventional retailers amid increasing prices and consumer apprehension. However, surpassing Amazon in its own domain remains a considerable distance away.
