Once in a generation, almost every blue chip company drops a bomb—and last week Wal-Mart (WMT) pushed the button.
At an investor gathering in New York, the world’s largest retailer warned that higher wages, higher spending on e-commerce and lower prices would slash earnings per share as much as 12% in the next fiscal year (ends January 2017).
CEO Doug McMillion also gave a tepid outlook for the following year, suggesting that EPS for FY18 would be “up slightly.”
Investors weren’t happy with the news.
Wal-Mart stock plunged 10% almost immediately, the stock’s biggest one-day decline since January 1988. Wall Street analysts chimed in with a slew of downgrades, and the shares fell another 1.2% the very next day.
As disappointing as the Wal-Mart guidance is, I’m taking it in stride—because I’ve seen this type of event before.
On March 7, 2000, Procter & Gamble (PG) issued a severe earnings warning. Result: The stock dove an astounding 31% in a single session.
Within a few days, though, PG found its footing. The shares went on to outperform the headline indexes by a wide margin over the next 18 months (during a very difficult period for the market, by the way).
I don’t expect such a quick rebound this time for Wally. Higher wages, which the company has promised its employees (and which it needs to pay if WMT is to improve the quality of its staff), will be difficult to absorb in an environment of low inflation and cutthroat competition.
Nonetheless, I’m pleased that Wal-Mart is retaining its commitment to dividend growth.
The retail behemoth is also planning a $20 billion buyback to support the stock while management turns the ship around. WMT continues to rate a buy, although I’m lowering my price limit to $62 to reflect the shares’ lower projected trading range over the next few months.
Looking out three to five years, I think WMT will outperform the S&P 500 by a comfortable margin, just as PG did after its pratfall 15 years ago.
