Walmart (NYSE:WMT) stock received an analyst upgrade to “strong buy” Monday on signs that investments in its U.S. stores are starting to pay off, but c’mon.
WMT is a dog of a stock that has plenty more drooling to do. The stores still look terrible and Walmart is awash in other problems, the biggest of which it can do nothing about.
Just last week, WMT admitted that half of all its stores could look better — a generous assessment by any measure. Complaints about customer service abound. And there’s nothing much WMT can do about that growing chunk of the population that has had it with big box retail.
But it’s uglier than all that. Even after setting aside the problems with stores looking faded and crappy, Walmart stock looks doomed to trade sideways at best because of the tremendous headwind of a stronger dollar.
WMT derives about a quarter of its total sales from international markets, and the strong dollar is taking an axe to those receipts. It’s also getting worse. WMT now sees unfavorable foreign exchange costing the company $14 billion in revenue this year, up from a prior forecast for $10 billion.
There’s nothing WMT can do about foreign exchange. And and although its expensive investments in its employees, infrastructure and systems are defensible, they’re not helping the bottom line anytime soon. Between raising wages and building out its e-commerce platform, costs are going to be headwinds for earnings for the next couple of years.
Too Soon to Buy WMT
As investments in the business, they will probably prove to be worth it. It’s just far too soon to get excited about it. Analysts at Raymond James upgraded WMT from “outperform” on some new traction in the U.S., but there’s only anecdotal evidence to back that up.
Sales and same-store sales missed analysts’ average estimates in the most recent quarter. Total revenue was essentially unchanged year-over-year. Same-store sales — a critical measure of a retailer’s health — advanced only 1.1% versus a forecast for 1.5%.
Consumers — especially Walmart’s bedrock of lower-income shoppers — aren’t spending like they used to. That’s been true for years and is most painfully underscored by their failure use their savings from gas for much beyond paying down debt.
At the same time, the dollar is strong with nothing on the horizon to suggest it will cool off anytime soon. And Walmart is in the midst of an expensive, two-year program of reinvention.
Stock prices move on the promise of earnings growth, and Walmart doesn’t have any — at least this year. The Street predicts a decline of 6% in earnings per share for all of 2015. There’s a reason why Walmart stock is off 15% for the year-to-date (and back to levels last seen a couple of years ago.)
As we’ve noted, between company-specific and macroeconomic pressure, Walmart stock looks like it will trade sideways at best this year.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
