It’s been a tough week so far for walmart (WMT -2.49%). Shares of the retail giant fell 11.4% on Tuesday, its worst single-day drop since 1987. And shares fell nearly 7% more on Wednesday, falling along with the broader market .

The consumer staples giant took a swipe at missing earnings estimates and cut its earnings forecast for the rest of the year. While there’s no doubt that a double-digit decline is disappointing, there are several reasons why the quarter wasn’t as bad as it looks.

An inflationary story

Like most U.S. businesses, Walmart is grappling with inflationary and supply chain pressures, and labor shortages have made it difficult for the company to boost profits. Walmart raised salaries last year for frontline workers, but it’s still struggling to fill key positions.

The company announced a few weeks ago that it was raising starting salaries for long-haul truckers up to $110,000, nearly double the national average, according to Glassdoor. The Wall Street Journal also just reported that the company is struggling to fill store manager positions despite offering a $200,000 salary. Walmart acknowledged that wage pressure was a key reason Walmart US operating margin shrank nearly a full percentage point to 4.6%, or $4.5 billion in profit. exploitation.

But even with adjusted earnings per share in the quarter falling from $1.69 to $1.30, this performance was still better than it looks. Most of Walmart’s retail peers have yet to report earnings, but Amazon (AMZN 1.26%) announced an operating loss of more than $1.5 billion in its North American e-commerce business, a sign that it has faced strong headwinds from inflation and excess capacity after increasing during the pandemic.

There were also a number of bright spots. Grocery sales grew by double digits at Walmart US, partly due to inflation, and Walmart also gained market share in this key category, which accounts for the majority of its revenue. The company, known for its “everyday low prices” model, has traditionally weathered recessions and viewed them as opportunities to gain market share. In fact, gaining market share is more important to its long-term performance than inflating quarterly earnings by raising prices, and investors should support a strategy that focuses on market share gains rather than earnings. short term.

Sam’s Club also continues to post exceptional results with comparable sales up 17%, or 28.1% over two years. E-commerce sales increased 22% in the club chain and member revenue increased 11%. Profits were also down at Sam, but that revenue growth should pay off in the long run, and it shows that Walmart has successfully turned around a business that has long weighed on overall results.

The real reason Walmart shares plunged

While it’s no surprise to see a stock plummet due to a shortfall and lower forecasts, the reason Walmart fell double digits may have more to do with its valuation entering the market. report, rather than with the results themselves.

Heading into the first quarter report, Walmart was actually in positive territory for the year, up 3% for the year compared to a 14% decline for the S&P500. After Tuesday’s plunge, Walmart stock was still outperforming the broad market index, down 9% for the year.

WMT given by Y-Charts

With management now calling for adjusted earnings per share to be flat from a year ago at $6.46, Walmart is trading at a forward price-to-earnings (P/E) ratio of around 20, essentially in line with the P/E of the S&P 500. . Walmart, a slow-growing consumer staples stock, typically trades at a deep discount to the S&P 500, but investors have crowded into consumer staples stocks this year to take refuge from broader market volatility. , dropping growth stocks and technology stocks in the process. Walmart now has roughly the same earnings valuation as Alphabet although Google’s parent company is growing much faster than Walmart.

Walmart’s plunge on Tuesday therefore appears to be a sign that the pendulum has swung too far as investors try to prepare for a possible recession. The stock reaction shows that growth stocks have become too cheap at this point and safe stocks like Walmart are too expensive.

For Walmart itself, fiscal 2023 is shaping up to be a tough year, but the company should emerge from the current volatile environment in a stronger position. However, without the usual S&P 500 valuation discount, it will be difficult for the stock to outperform in the near future.