Morningstar DBRS Confirms Walmart Inc.'s Issuer Rating at AA With Stable Trend

DBRS Limited (Morningstar DBRS) confirmed the Issuer Rating of Walmart Inc. (Walmart or the Company) at AA with a Stable trend.

KEY CREDIT RATING CONSIDERATIONS
The credit rating confirmation acknowledges Walmart's stronger-than-expected operating performance during the last 12 months ended January 31, 2024. Despite the challenging macroeconomic backdrop, Walmart benefitted from volume growth and higher transaction counts, particularly in the grocery and health segment, combined with margin recovery. The Stable trend continues to reflect Morningstar DBRS' view that, despite the near-term headwinds associated with decreased consumer purchasing power, Walmart's overall credit risk profile will remain commensurate with the current AA rating category.

CREDIT RATING DRIVERS
Should credit metrics weaken for a sustained period (i.e., debt-to-EBITDA increase above 2.0 times (x)) as a result of either weaker-than-expected operating performance and/or more aggressive financial management, the credit ratings could be pressured.

Conversely, although highly unlikely, Morningstar DBRS could take a positive credit rating action should the Company's business risk profile meaningfully strengthen, combined with a commensurate improvement in credit metrics on a normalized and sustainable basis.

EARNINGS OUTLOOK
Morningstar DBRS expects Walmart's earnings profile to remain relatively stable over the medium term and continue to underpin the current credit rating. Morningstar DBRS expects sales to continue to benefit from Walmart's value-driven proposition for price sensitive consumers, the strength of its omni-channel capabilities, and organic growth in food and healthcare categories, as well as full-year contributions from new stores. As such, Morningstar DBRS forecasts the Company's revenue to grow in the low- to mid-single-digits to approximately $670 billion for the fiscal year ended January 2025 (F2025) and toward $700 billion in F2026 from $648 billion in F2024. Morningstar DBRS anticipates EBITDA margins to remain relatively stable at around 6% in the near term and gradually improve toward pre-covid pandemic levels of around 6.5%. This recovery should benefit from cost inflationary pressures subsiding, sales penetration from higher margin private label brands continuing to increase, and a gradual recovery in general merchandise category, as well as efficiency improvement initiatives. As such, Morningstar DBRS expects Walmart's EBITDA to improve toward $40 billion in F2025 and toward $42 billion in F2026 from $39 billion in F2024.

FINANCIAL OUTLOOK
Morningstar DBRS believes Walmart's financial profile should remain appropriate for the current rating category. Excluding any material effect from nonoperating income or expenses, Walmart's cash flow from operations (before changes in working capital) is expected to be well above $30 billion in F2025 and further increase toward $34 billion in F2026, more than sufficient to cover capital expenditures, which are forecast to be around $20 billion annually, and dividend outlays of approximately $6 billion annually. As such, Morningstar DBRS forecasts free cash flow (before changes in working capital) to be well above $5 billion in F2025 and above $6 billion in F2026. Morningstar DBRS believes the Company will continue to take a balanced approach to capital allocation, applying these free cash flows toward returns to shareholders and/or growth acquisitions, such that key credit metrics remain appropriate for the current credit rating category.

CREDIT RATING RATIONALE
Walmart's credit rating remains supported by its large size, dominant market position, relative resilience to economic cycles, strong cash generating capability, and prudent financial management. The credit rating also continues to acknowledge intense competition, the mature nature of some of Walmart's core markets, and the risks associated with international expansion.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS   
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.
 
A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://dbrs.morningstar.com/research/427030, January 23, 2024)

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)

(A) Weighting of BRA Factors 
In the analysis of Walmart, the relative weighting of the BRA factors was approximately equal. 

(B) Weighting of FRA Factors 
In the analysis of Walmart, the relative weighting of the FRA factors was approximately equal. 

(C) Weighting of the BRA and the FRA 
In the analysis of Walmart, the BRA carries greater weight than the FRA. 
 
Notes:
All figures are in U.S. dollars unless otherwise noted.

Morningstar DBRS applied the following principal methodology:
-- Global Methodology for Rating Companies in the Merchandising Industry (https://dbrs.morningstar.com/research/431175; April 15, 2024).

The following methodologies have also been applied:
-- Morningstar DBRS Global Corporate Criteria (https://dbrs.morningstar.com/research/431186; April 15, 2024)
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://dbrs.morningstar.com/research/427030, January 23, 2024)

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info-DBRS@morningstar.com.

The credit rating was not initiated at the request of the rated entity.
The rated entity or its related entities did not participate in the credit rating process for this credit rating action.
Morningstar DBRS did not have access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.
This is an unsolicited credit rating.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS trends and credit ratings are under regular surveillance.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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