Daybreak Holiday: Walmart, Oil, ETFs
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Thanks for joining us on this special holiday edition of Bloomberg Daybreak. U.S. markets are closed for President's Day. I'm Nathan Hager, and coming up this hour, we will get a read on the energy market after a winter that has seen wild swings in the weather and on trade. Plus, we'll look ahead to one of the biggest earnings stories of the week as Walmart gets set to report results from the holiday quarter.

First, though, we want to take a look at the broader investment landscape, how it may be changing with a new president in office. I think it's pretty safe to say it was a pretty tough environment as far as regulation goes when Gary Gensler was head of the Securities and Exchange Commission under then President Joe Biden. Now, with a new SEC chief on the way under current President Donald Trump.

Are things starting to change for investors? Let's get some answers on this. Joining us on this holiday is Eric Balchunas, ETF analyst for Bloomberg Intelligence. Thanks so much for being with us on the holiday, Eric. And I know we've got a lot of acting commissioners, acting chiefs on the way as well. But are things starting to change now as far as

where things sit in your world and ETFs? Yeah, there's been a couple small things that we've seen, nothing major. But I think one of the big things is Esther Peirce, which she was a commissioner, she is a commissioner, and she was in the minority during the Gensler era. And she had a lot of opposing opinions that she would write about. And now she's working, one of the two commissioners of the act is helping the acting commissioner. And some of the things we've seen, for example, they approved options on some

precious metals ETFs that have been waiting 10 years. It's a minor thing, but it just shows I think she just wants to get stuff out the door. In the end, you know, she was very big on the SEC being a merit-based regulator, meaning you just want to get the disclosures out and then let the consumers pick.

You don't want to play nanny too much in sort of saying, this is bad, this is good. So I think what you're going to see is just a little bit of a Pandora's box opening up with products. And I think some will be really good and successful. Some are going to be a little wild and will cause some head scratching maybe. But this is the ETF industry always pushes the envelope. And they're just going to be able to push a little further, I think, under this SEC chair, who hasn't been confirmed yet, but assuming he is.

He'd be working, obviously, with Hester Purse. And the other thing they did was they moved a bunch of people who were on a crypto fraud. They moved some people out of that team. And that, again, was another sign that in terms of the crypto, which was, I think, Gensler's like, you know, he was most known for being tough on that.

it's going to be more lenient for sure. I would look for a ton of new coins and tokens to be ETF-ized. And I would look for the industry also to push the envelope on some other things like ETF share classes and maybe even some things like trying to put private equity and private credit into ETFs, knowing they have a more liberal regulator. I mean, the regulator is more conservative, but I'd say they're more liberal in terms of what they'll approve.

Well, let's dig into those broad strokes just a little bit. What kinds of products are you looking forward to that could find some success among investors? Yeah. So I think the first two are ETFs tracking Solana and XRP, which are two different networks. They're cryptocurrencies. And

Those two in particular, the industry's been trying to get those approved for like five years. And even though Gary Gensler approved Bitcoin and Ether, he basically said everything outside of that is a security and therefore it cannot be put into an ETF under the 33 Act. And they even called XRP and Solana securities in lawsuits. And so the fact that the Solana ETF was acknowledged recently, there was a new filing that got acknowledged, they

They never acknowledge one in the past. Acknowledge just means the SEC is like, okay, we know you filed. We're going to let people comment on it. It's part of the normal process. In the past, when someone tried to file a Solana or XRP ETF, they would literally call the issuer and say, get this out of here. It wouldn't even last three days. But this, they've been filed now for two weeks. They've been acknowledged. They're moving along the normal path. It doesn't mean to be approved, but it's a good sign. That probably indicates that they may actually rescind some of the lawsuits.

because it would be weird for them to approve these while having a lawsuit and saying in writing that these are securities. So that's something to watch right there. And if Solana and XRP are put into ETF form, they have, I think, a decent chance to get some assets. Now, once you get out of there, you're going to get into some weird stuff like Dogecoin, Polkadot, Bonk. They even filed for a Trump coin ETF, a Melania ETF, and a double levered Melania. So here's the thing, though.

Even if all that gets out, most of it will just live in oblivion. I think you've got, think about the precious metals. Gold is the stud. Silver got a good living. Platinum, palladium, eh. And then once you get to commodities like coffee, nickel, aluminum, some ETFs were tried and failed. I think you'll see the same thing here. I think Bitcoin will get like 75% of the assets, Ether 10%, and then

And then XRP Solana will fight over the other 8% or 9%. And then we'll see one wacky one get lucky for a minute and then rise and fall. So I think even though we will see a ton of stuff approved, most of the assets from the big money in America, they're not going to go crazy. They're going to stick to Bitcoin as their – that's crazy to most people, to be honest. So they're going to stick to Bitcoin as their –

And that's where most of the assets will go. But look for some really interesting things. And the thing about a Trump and Melania coin ETF is I would say this was

going to be interesting is that these are pretty fringe. I mean, they just launched. It made clear to everybody that the Trump coin was, you know, a lot of even the crypto people didn't like it. It kind of, they call it a rug pull. You know, you put a meme coin out and then all of a sudden the people who started leave and then the people who came in late hold the bag. It's like, you know, kind of a short-term Ponzi effect. Now, that's Trump is the boss of the SEC chair. So it'd be weird if you didn't approve

a coin based on his coin, given that he's the boss. This is where it all gets a little, it's going to be interesting to see how they deal with this because we do think some of the main coins will be approved. But once you get to this really outskirts-y meme coin world, will the SEC just sort of let it out? That's a question we don't quite know. But if I had to guess now, I'd lean towards they'd probably let most stuff out. But for people worried about how this will be bad,

most of this stuff will be ignored by investors. Speaking with Eric Balchunas, ETF analyst for Bloomberg Intelligence. Eric, if we're expecting these kind of approvals, what are you expecting when it comes to enforcement of some of the potential risks around some of these new products? This is where the big debate on what should the SEC be. Should it really police the products and vet them and say, is this really safe for retail?

It's sort of, I guess, like the FDA at some point. There's a line between what is safe versus, hey, let's just disclose all the risks and let people have a choice. And if they want to – if someone wants to eat McDonald's every day, it's really their choice, even though that's not healthy. And you could argue the government should ban McDonald's. But this is the same deal, and I think this SEC with this chair is going to be a little more like –

Look, just let this stuff out. Let people choose. But just we're going to put a lot of the risks in the prospectus. Now, nobody reads the prospectus. That's the problem. But I think most people, if they see a 2x Melania ETF, they're probably going to know it's wacky. Like they're going to know there's some it's not Vanguard. OK.

But this whole thing is why we in BI have something called the traffic light. It's based on movie ratings. I always thought ETFs see movie ratings. That way you know if the name sounds innocent, maybe you know if the ETF has some stuff you need to know about, just sort of like –

a nasty surprise indicator system. And so we would give most of these yellow lights. The 2x Milani would be red because it's leveraged. 1x Milani would be yellow because it's going to extra volatility and there's really no cash flows backing any of this. It's like just like a commodity. So I just think

That would be helpful for investors to have, like, imagine if you went on your Schwab account and you pulled up any ticker and it said, you know, rated G, PG, PG-13, or R. You get a very good idea of, like, okay, if this is R, why? And here's the three reasons it got a rated R tag.

To me, that would be awesome. We did create this system. It's on the terminal. But that's, I think, how you should think as an investor if you're looking at this stuff. If it sounds wacky, read the fine print. If it sounds innocent, like the Vanguard S&P 500, it probably is.

But every now and then there are some with innocent names that are a little more involved, like the oil ETF. But I think most of these are going to sound wacky, and they are wacky. But always, I would read the prospectus if you can, and that's what the SEC is going to say. Just put all this stuff, all the risks in the documents, and that's the kind of –

Because they want innovation and they want things to be out there for consumers. But there is a point where you can put something out that somebody could lose money on. But this is, again, the debate on what a regulator should be.

Eric, now that we do have a new administration in office, have you seen some interesting shifts in ETF flows now that there's new leadership in the White House? It's interesting. You know, I think ETF investors over the years, you know, we wrote a piece saying the S&P 500 doesn't care who the president is. It's almost like the U.S. stock market. We call it the eighth wonder of the world because it's just so relentless.

It's almost like immune to any of this. And I think over the years, even if there has been drama and maybe a pullback, it goes right back up.

And so we have seen no change in the flows from last summer into fall, into the winter, into this 2025. It's basically been a lot of people continue to buy what we call beta, the S&P 500, the aggregate bond ETFs. The 60-40 people are just continuing to buy. Now, on the fringes, there is some stuff that we see –

moving, like, for example, in the bond space, we do see people moving towards the shorter end of the curve, more towards like a money market type deal. And I think that's a little protection. We've seen, obviously, money go into the Bitcoin ETFs and some into gold. There's some thought that that is, you know, an inflation hedge.

And then the stock market, sometimes we'll see some flow like try to bet on small caps having a rebound or Europe. But those are usually short-lived. So you do sometimes see people trying to bet on some kind of a rotation or regime change. So again, on the outskirts, we see bets being made. But for the most part, this sort of mainstream flow of money can

continues to buy U.S. stocks at a breakneck pace. And it's going to take more than just like a scary tariff headline to get these ETF investors to change direction. And why would they? They've almost been conditioned like Pavlovian dogs to just keep buying because it's worked out.

If you've ever read a scary headline, pulled your money out, put in cash, you're basically filled with a ton of regret.

And so this is where we're at, why I think that it will take like a black swan event, in my opinion, to really see anything shift. Something like the COVID, something we're not, not tariffs, you know, not a crazy tweet. Like it has to be something like really major that nobody's even looking at, in my opinion, for the, you know, general blob of money to like stop investing or to move out of stocks. Really appreciate this, Eric. Thanks again for coming on with us. You

You got it. Anytime. That's Eric Balchunas, ETF analyst for Bloomberg Intelligence. And coming up next on this special holiday edition of Bloomberg Daybreak, we're going to take a look at the oil market, how that may be shifting under the new administration. We'll be speaking with Stephen Shork, president of the Shork Group. It's 20 minutes past the hour. I'm Nathan Hager, and this is Bloomberg.

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Welcome back to this special holiday edition of Bloomberg Daybreak. U.S. markets are closed for President's Day. I'm Nathan Hager, and we want to take a look now at the oil market. Commodities across the board have been rocked with President Trump threatening and in some cases imposing tariffs on friend and foe alike. Here

Here to give us a sense of the energy outlook as we make sense of this new tougher trade policy is Stephen Shork, president of the energy analysis firm The Shork Group. Thanks again for being with us, Stephen. And we have seen oil prices really take a hit on the tariffs that President Trump has already imposed and the threat of more to come. How do tougher trade policies affect your outlook for the months to come?

Yeah, absolutely, Nathan. So what I like to do, of course, is always look at the market's term structure or its forward curve. And with all of the rhetoric and some of it has made good on with regard to the tariffs, when it comes to oil, we have to think about this logically. A lot of this is bluster. The United States and specifically our refineries in the upper Midwest and Chicago market area are wholly dependent on importing crude oil

from Canada. These refiners are geared specifically to refine Canadian heavy crude oil. So with regard to the tariffs when it comes to oil, I think it's a bit of brinksmanship. So far, I think the administration has blinked on that matter because the last thing the administration wants to do, of course, is drive up oil prices, which we'll

consumers will begin to feel immediately at the pump. So that said, when we look at the term structure, the market's been fairly stable. NOMIX WTI has been range-bound in between about $70 and $75 a barrel for this quarter,

which is in perfect agreement with our modeling that we came out. We entered this year with oil at about $69.50. The midpoint for this quarter, based on our modeling, is about $71.60. And as I said, the market has pretty much been range-bound in between $70 and $75.

Most importantly, a recent survey put out by the Dallas Federal Reserve to oil executives in the oil patch down in Texas, Oklahoma, Kansas, so forth, were asked what they were planning oil prices based on their capital spending. And as long as oil prices hold in that $70 to $75 range, not coincidentally, oil prices

the industry will continue to invest. So from this standpoint, the tariffs, the talk, the rhetoric, yes, it makes a lot of noise. But when you look at the relatively lack of volatility, so we're looking at a market when we look at whether it's range bound, there's a lack of volatility. The market has been relatively stable as far as looking at the spreads. The spreads are indicating, that is to say, as we look at prices along the forward curve, the market is well balanced. No one

is clamoring for product. - So do you see any factor breaking the oil market out of this range? And if so, is it gonna go up or is it gonna go down? - I think the risk is certainly to the downside. Of course, the big two geopolitical headlines out there are sanctions and a harder stance on Russian and Iranian oil. And of course, that is a potential uptick that would propel oil prices higher.

But again, looking at the forward curve and the term structure in oil markets,

all around the world, traders are placing a maximum of minimum concern on these geopolitical events. So just as we've seen over the past two years, when war in the Middle East broke out, it's less about supply, more about demand. So the supply issues were always, okay, supplies out of the Middle East transiting through the Red Sea with all the attacks on shipping. That's a supply issue, but it's

but it had not impacted prices. So the concern now is more of global economic growth. And when we say that, when it comes to oil, of course, we're talking about China. But we've been waiting for Godot when it comes to China for the past three years with this demand to hit. It has not hit. I don't think it's going to hit in this year. So certainly, if there is a risk that break us out of that range, Nathan, it is certainly oil prices below $70 a barrel rather than oil prices above $80 a barrel through the first at least six months of this year.

To your point about waiting for that demand shift to change coming out of China, it gets us into the next OPEC Plus meeting and the decision on whether to continue with the delayed production increases from the oil cartel. What's your expectation there?

Yeah, exactly. So there's speculation, of course, if we're tougher on Russia, we're tougher in Iran. The other OPEC members, primarily the Arab oil producers who don't have a lot of love lost between the Arabs and the Iranians, that Saudi Arabia and

and so forth will increase production. But that is just trying to play geopolitics 101. What we have to look at, again, is the spread, the spread between Brent Dubai, the Dubai spreads, the Middle East spreads. And what we're indicating here is, once again, a market that is relatively stable on a global standpoint. So once again, OPEC is going to look, rather than look at

uh... the potential they're gonna look at what the market's telling them their analysts are excellent at looking at this so i would suspect is a fifty fifty chance that they'll they'll maintain status quo i_d_ don't take the production uh... uh... you know the quota uh...

adherence, they'll kick that can down the road until their next meeting unless they see something that happens in the spreads. And right now, the spreads are telling OPEC, they're telling traders that the market is in balance at this point, regardless of all these known unknowns of geopolitical events, be it Iran, Russia, the war in Gaza between Iran and Israel, basically, and the

certainly the situation in Ukraine. So until we see something hard, tangible to trade on, the spread is telling us, no, OPEC will maintain the status quo. We're speaking with Stephen Shork, president of the Shork Group, energy analyst with us on this

special edition of Bloomberg Daybreak. I know you said we should look past the noise when it comes to the oil market, Stephen, but if you'll indulge me for a minute, we have heard noise, if you want to call it that, from President Trump on the campaign trail now in office saying, drill, baby, drill. He wants to boost energy production in this country. Is that something you're thinking about when it comes to the outlook for crude?

Of course. And that really hammers home the point of the rhetoric. So, yes, the president will want to talk about drill, baby drill. But guess what? We are drilling, baby. And we are drilling a lot of oil at this point. So, again, I'll reference that. The response is to a survey to E&P executives put forth by the Dallas Fed and their response is,

That is, the industry response is relatively lukewarm to the idea of drill, baby drill. Why? Because we're already drilling more oil than we ever had, and we are by far drilling the most oil than any country in the world. So there really isn't a lot of meat left on that bone for us to drill even more. So according to those responses, you only have 14% of the responses coming from these executives that said they plan to increase oil

capital spending significantly. The majority of the executives at these current prices are comfortable with drilling at current rates, i.e. there is no need. The market is telling them they're not getting any signal from the market to drill. So yes, President Trump or

or President X, if you want to call him, or President Tariff, will certainly beat the drums about drill, baby, drill. But the bottom line is we're already drilling, and there's just not that much more at this juncture, given this price range, for us to drill even more. It does not make any economic sense for any producer out there.

We've been talking about the price range for crude, the term structure. How does all this feed into where the rubber literally meets the road in terms of gas prices that we should expect to pay as we head into the spring and summer months?

Yeah, absolutely. So right now, according to the latest survey by AAA, the national average is about $3.15 a gallon, slightly higher, $3.20 in the metro New York City area. But that $3.15 is, no, excuse me, I take that back. That was $3.15 today compared to $3.20 a year.

a year ago. So basically, we're on par to a year ago. Adjusted for inflation, $3.50, as you can all imagine, is a very cheap price. With oil remaining stable, low volatility, we can maintain that status quo. But let's keep in mind, we are in February. Once we get into March, April, May, we start burning

in our cars uh... a different type of boiler should take a different type of gasoline a summer great gasoline which is more expensive to blend and market and transport and so forth so we will feet and natural increasing gasoline prices

Typically, that would be about between $0.15 and $0.20 between winter gasoline and summer gasoline. So given the current price environment, that range amount of $70, $75 at $3.15, by the time Memorial Day, the 4th of July, rolls around and we're all going out to the beach or up to the Poconos, gasoline prices would naturally at this range be probably $3.30, $3.35 in the current environment.

OK, now where the environment is right now and with crude prices in this range, how does that affect the energy transition? I mean, we've seen the talk of the end of the electric vehicle mandate. There's a new administration that is very bullish on crude. Where do you see the energy transition going forward?

Basically, where I saw it going backwards. I think the whole concept of the energy transition, it was great for PowerPoint presentations and global economic forums and so forth. But the industry understood that demand for fossil fuels was not moving anywhere, that fossil fuel demand will continue to grow. India just came out and said they expect fossil fuel growth to continue until 2050. The same goes for China.

and so forth. So what we're seeing now here is more of an economic even playing field where these mandates, if it's economically viable for full EVs or for any of the energy transitions, then we wouldn't need, the government that is, wouldn't need to underwrite it. So what we're seeing now here is a transition that is more of an all-inclusive. And I always go back to

President Obama's 2012 re-election platform where he

He recognized that there was a need, a growing need for renewables, of course. But equally, he also, and I encourage our listeners to go back and reread his 2012 platform, because it also embraced nuclear. It did embrace clean coal. It embraced natural gas and fossil fuels. So we're going back to this energy transition is moving more from a binary transition, that is to say, I have to kill oil.

all of my dispatchable energy, and now I have to have it all replaced by intermittent weather-related BTUs. We're moving away from that, and we're moving more towards an all-inclusive policy where renewables, of course, will play a role in this, but so too will natural gas, nuclear energy, and other fossil fuels, and it will be an

all of the above approach to our energy needs going forward for at least the next four years, as opposed to the zero-sum game where we have to kill fossil fuels and we can only use renewables, which was and always has been known to be untenable. We're now saying the quiet part out loud.

Really appreciate this, Stephen. Thanks again for coming on with us. Absolutely. I always enjoy being back here. That's Stephen Shork, president of The Shork Group. And straight ahead, we'll look ahead to earnings from Walmart this week as this special edition of Bloomberg Daybreak continues. It's 38 minutes past the hour. I'm Nathan Hager, and this is Bloomberg.

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Welcome

Welcome back to this special holiday edition of Bloomberg Daybreak. U.S. markets are closed for President's Day. I'm Nathan Hager. Closing out this hour with a look ahead to one of the big earnings stories of the week coming from one of the world's biggest retailers. Walmart reports results from the holiday quarter this Thursday. But what can we expect from the outlook for this retail giant with so much uncertainty around the economy?

not to mention trade policy. Here with some insights for us is Arun Sundaram, Senior Vice President for Equity Research at CFRA. Thanks for being with us, Arun. Looking at the chart right now, Walmart stock.

It's up more than 10% year to date. Can we expect that kind of bull run to continue when the retail giant posts those earnings this week? Walmart tends to guide conservatively to start the year. So don't be surprised if you do see a softer than expected outlook.

But I think investors typically look at that outlook with a grain of salt because Walmart tends to, at least over the last few years, they have raised their outlook as the year progresses. So expect to be on top and bottom line, potentially a weaker than expected outlook. But I don't think that should send the stock that much lower. What's going to drive the beat, do you think? Is it just going to be about the bounce that we tend to see for retail around the holidays? Well, it's going to be about the bounce that we tend to see for retail around the holidays.

Well, yeah, I mean, for Walmart, yeah, in their U.S. business, yeah, the strong holiday season should drive a beat to the top line. When they reported Q3 results, they even noted back then that early results for their holiday season was encouraging. And we do know that the overall holiday season was pretty strong overall.

And I think one thing we often overlook with Walmart, too, is that they have a very large international business that has been growing in the high single-digit percentage range over the last few quarters. They're doing well in regions like Mexico, China, Canada. All those regions are doing pretty well. And then lastly, Walmart also has their club business, Sam's Club, and that's also been performing really well. We talk a lot about Costco and how well Costco is doing, but Sam's Club seems to be a formidable competitor to Costco, and it's also growing at a mid-to-high single-digit percentage range.

Interesting to hear you single out China, Canada and Mexico as far as growth drivers internationally. Those are the three countries that have been targets of tariff threats from President Trump. How could that affect the outlook if we start to see trade uncertainty creeping into these earnings?

Yeah. So that's another reason why I do think the outlook could be more conservative than usual. We saw that with Amazon when Amazon reported recently that there is more uncertainty this year than previous years. We have potential tariffs. We have inflation that looks like it's going to accelerate this year. We still have high interest rates.

and all that kind of clouds an already pretty cloudy outlook. So I do think we'll see a conservative outlook in that regard. But regarding its international businesses, although they're a global company, they do have pretty localized supply chains. A lot of what they supply and produce and sell, a lot of it is located domestically. So, yeah, I mean, they're going to face tariffs. If there are tariffs, it's clearly going to be a headwind for Walmart. But I

I think they'll be able to mitigate that headwind. And again, this is not their first rodeo with tariffs. Walmart experienced the trade war with China back in 2018 and 2019. So I think generally retailers are better prepared for tariffs this time around. So you don't expect to see much of a shift in the supply chain flows for Walmart, even if we do see even more aggressive tariffs than the president has talked

Yeah. So I think from the first trade war with China back in 2018, 2019, since then, all retailers have diversified their supply chain a bit more. And a lot of them have moved out of China, went to regions like Vietnam, Cambodia, India, places like that. And so I think generally we're seeing a much more diversified supply chain. So that does help reduce tariff risk. And Walmart U.S.,

About two-thirds of the items that sell in the U.S. are made, grown, or assembled domestically in the U.S. That is a large percentage of their products. So it's only about one-third of their goods that are imported. A lot of that is in China. So I think

Because Walmart is predominantly a food retailer, I think they're better and a lot of food products are domestically produced. I think they face less tariff risks than general merchandise retailers. Retailers like Target, for example, that sell predominantly general merchandise items. A lot more of those goods are imported from other countries.

I was curious whether we could see something of a trade impact on food when you think about Canada and Mexico being agriculture suppliers to some extent into the U.S. Could that be a headwind for Walmart? Yeah, so there's potential implications in food with tariffs, especially I think a lot more agricultural commodities, things like fruits and vegetables that we often import from places like Canada.

and Mexico. So yeah, that's an area where, I mean, we're watching closely and we could see inflation accelerate in a lot of those fresh categories. I mean, Walmart's still the leader in price. And I think they typically have more levers than others to absorb some of these cost increases. But then as they, there's only so much they can absorb and anything incremental that they can't absorb will likely be passed on to the consumer. But again, Walmart being the value retailer,

they tend to have the lowest prices in town. And that's why I think Walmart typically does well in inflationary environments because they can provide that value that other retailers can't necessarily do the same. We're speaking to Arun Sundaram, Senior Vice President for Equity Research at CFRA, looking ahead to those Walmart earnings coming up later this week. Ahead of these earnings, Arun, we've heard from companies like McDonald's talking about pressures that they see on the low-end consumer.

And we've seen this phenomenon lately as inflation has stayed elevated. A lot of higher end consumers have been shopping for value at places like Walmart. How do you see that feeding through potentially into what we get this week? Yeah, that's been a theme for the past year or two. And I think that's what

that's going to continue in 2025, yeah, clearly the lower income consumer is feeling a bit more stress right now. And you would think that, you know, Walmart, you know, you think this would be hurting Walmart, they wouldn't be seeing these strong results. But I think they've been able to offset that by bringing in incremental middle to upper income consumers. And I think one of the reasons they've been able to do that is because of the new subscription model, Walmart Plus.

Walmart Plus is a direct competitor to Amazon Prime. You get fast free delivery on groceries. And I think that Walmart Plus business is doing really well. And they don't disclose the exact number of members that are signed up. But from our channel checks, it seems that it's growing at a pretty good rate. I mean, even Walmart's e-commerce business, it's growing at about 20% clip rate.

year over year. I think a lot of that is because they've been able to bring in more of those Walmart Plus members in there. And I think Walmart Plus is great because that helps also retain those higher income households. And even when inflation does come down, now once you lock these customers in, you drive more conversion. So that's why we're pretty optimistic here because Walmart's always been known for a value retailer, but they're actually now being

better known for convenience. That's usually a title that's held with Amazon as the leader in convenience. But now Walmart, I think, is doing better in the convenience factor. And if you combine value and convenience, that's a pretty strong proposition for the consumer. Sort of fed into my next question, thinking about how Walmart stacks up against Amazon with this kind of...

subscription model, I guess a consumer loyalty program. You might think of Amazon as sort of a first mover with Amazon Prime. Is Walmart chipping away at Amazon Prime with its offering? Yeah, Walmart Plus is a direct competition against Amazon Prime. But I think where Walmart has always had a stronghold is in grocery.

That's an area where Amazon has struggled over the last several years. Amazon bought Whole Foods several years ago. That business is doing well, but their local business or their own business called Amazon Fresh hasn't performed up to expectations. And I think...

Amazon has really struggled in the grocery arena, which is where Walmart has always shined in grocery and perishables. So I think a lot of, I mean, from a stat I saw earlier, a large percentage of Walmart Plus subscribers are also Amazon Prime subscribers. So people tend to have both subscriptions. And they use Walmart Plus for groceries, and they use Amazon Prime for everything else. And Walmart Plus is a little bit cheaper. It's $98 per year.

in the U.S. Amazon Prime is about $140 per year in the U.S. And I think you get, because of the different offerings you get, you tend to see consumers sign up for both. So also curious to get your thoughts on whether we could see wage pressures for Walmart coming down the line. Because I'm thinking about Costco coming out with its $30 an hour wage for workers there. Is that going to put pressure on Sam's Club, the subscription service that Walmart offers?

Yeah. Yeah. So, I mean, wage investments, uh, wage pressures, that's been, that's been a headwind for several years now. Uh, Sam's club, they actually just recently announced a wage increase back in September of last year. Um, but that's going to be another continued trend this year. We'll likely see more wage pressures this year. Um, the good news is that, you know, when you have a company growing sales, you know, mid to high single digits, um, you can absorb some of those cost increases and it doesn't really impact the overall bottom line. But when you're, when you struggle to grow sales, um,

Like some other retailers are right now, it's very difficult to also grow margins because of all these added wage pressures. So at the end of the day, I'm not overly worried about these wage investments as long as Walmart is able to grow their sales at a mid-single-digit percentage range, which we do expect will happen in 2025.

In terms of Walmart's stock performance, it's hard to see a lot of pessimism around the stock, a lot of buy ratings on Walmart. Are there risks to that momentum? Yeah. I mean, the number one concern I get with investors on Walmart is not anything about the fundamentals. It's about how expensive the stock has gotten. From a 4PE perspective, it's trading at nearly 40 times of 4PE. Historically, it's traded about 25 times 4PE, so a pretty significant premium.

But, you know, the one thing I'll note is that, you know, Walmart shares used to be even more expensive back in the day, back in the late 90s, early 2000s, when they were significantly expanding their super centers footprint. The shares traded above 40 times forward earnings. And I think right now that the shares do deserve this hefty premium.

because of all the things we talked about already. But also, they're also growing their store footprint right now. They're growing more super centers across the country. They're also growing Sam's Club locations across the country. They're targeting 30 new Sam's Club locations across the country. And then lastly, and this is the most important thing, I think,

is that Walmart's business is diversifying. We talked about Walmart Plus and the subscription revenue they're getting from that. They're also generating a lot of advertising revenue as they grow out their e-commerce marketplace. And advertising, as you know, is a much higher margin business than selling groceries inside of a store. So as this advertising business continues to grow, I think you can see Walmart's overall margins continue to expand.

And when you're a retailer generating $600 billion per year and nearly $700 billion per year in revenues, every basis point of margin translates into a lot of profits. So that's what I'm pretty excited about. I think over the next few years, Walmart has many levers to expand margins.

because of things we talked about, but because of their subscription revenue, their advertising revenue, their growing their general merchandise sales. They're also introducing automation and robotics in their fulfillment centers. And all of that, I think, translates into pretty strong operating margin expansion over at least, I think, the next three years. And that's why I think the hefty premium can hold. And I think there's still upside to the stock from here.

Lots to consider as we wait those earnings from Walmart due out this Thursday. Thank you for this, Arun. Again, great having you on with us. Yeah, thank you.

That's Arun Sundaram, Senior Equity Research Analyst at CFRA. I want to deliver thanks as well to Stephen Shork of the Shork Group and Eric Balchunis of Bloomberg Intelligence. Thanks to you as well for joining us on this special hour of Bloomberg Daybreak for this President's Day. I'm Nathan Hager. Stay with us. Today's top stories and global business headlines are coming up right now.

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