Walmart (WMT -3.08%) is one of the largest and most powerful retailers in the world. It is performing quite well right now, with the company’s fiscal fourth quarter 2025 same-store sales ticking up 4.6%.
There’s a wrinkle in this number, however, because it is being supported by customers who don’t normally shop at Walmart. Here’s why that’s a problem.
What does Walmart do?
Walmart is a retailer, but that doesn’t even begin to address the vast scale of the company, which has a $790 billion market cap. It is a dominant force in general retail, in groceries, in club stores, and in the online retail arena.
The company generated a massive $462 billion in revenue in fiscal 2025 alone. It is hard to undersell just how important it is in the retail sector.
Image source: Getty Images.
That said, Walmart’s bread and butter has always been offering products at attractive price points. One of the company’s taglines is “Everyday Low Prices.”
Everybody likes a bargain, but the company’s core customer is lower down the socioeconomic spectrum. That isn’t inherently a bad thing, but it is important to remember that Walmart isn’t targeting upper-income households.
The fourth quarter was good, but there was still a small problem
Right now, Walmart is doing well, financially speaking. In the fourth quarter of fiscal 2025, sales rose 5% year over year in the U.S. market, the company’s most important region. The quarter included the all-important holiday season, so that’s a pretty impressive showing. Same-store sales (comps) rose a strong 4.6%, as well, with a 2.8% increase in traffic and a 1.8% increase in the average ticket size.
Basically, more people were shopping at Walmart and spending more each time they visited. That’s exactly what you want to hear if you are an investor in a retail stock. The full year, meanwhile, came in with sales up 4.7% and comps growth of 4.5%. So fiscal 2025 was a good year that ended on a strong note. There’s just one thing wrong.
When explaining the success of the U.S. business, management said “share gains [came] primarily from upper-income households.” So, an important part of that success was from customers who were trading down to shop at the company’s stores. This speaks to two problems.
First, if upper-income households are choosing to shop at Walmart, it suggests that the economy is not great for consumers. So, the chain’s core customer might be struggling right now, a fact that the increase in trade-down customers might be obscuring. While it is a positive that it can benefit from this non-core group right now, it is not a good sign for the business backdrop the chain faces today.
Second, Walmart’s core customers are not really in the upper-income category; they are middle- and lower-income shoppers who need everyday low prices quite literally every day. Upper-income customers are highly likely to trade back up when they feel more financially secure.
That means that the benefit from upper-income households is likely to be temporary. And if the retailer’s share gains are coming primarily from upper-income households, as management says, what will happen when those customers leave?
Walmart is executing well, but be cautious
The focus on upper-income households might feel like a small issue to complain about. Indeed, Walmart is doing well, and for now, it is good news that it can serve these trade-down customers.
But the stock is trading within 10% of its all-time highs. And the price-to-sales and price-to-earnings ratios are above their five-year averages. The dividend yield, at a miserly 1% or so, is near the low end of the historical range. The shares look expensive.
You could argue that since it is now doing well, it deserves a premium price. Fair enough, but it also appears like a lot of good news is priced into the stock. If anything goes awry, such as upper-income shoppers shifting back to higher-end stores, Walmart’s results could look less attractive.
And the stock, which is priced at a premium, could quickly fall. If valuation matters to you, you’ll probably want to avoid Walmart right now.
