Wal-Mart Stores, Inc. (WMT) stock hasn’t been a growth stock per se, for decades now. It’s an incredibly mature business that does one thing, brick-and-mortar retail, really, really well.
There’s nothing wrong with a company maturing, of course. It happens to all companies eventually. As investors, though, we’d really rather not see a company go into out-and-out decline, and unfortunately that’s exactly what WMT stock owners are seeing today.
Here’s a look at the trouble that Walmart is in, and how it plans to battle its way out.
WMT: Historic Point in Company History
Let’s not sugarcoat things: Walmart is weak right now.
Amazon.com, Inc. (AMZN) continues to grow like kudzu on steroids; meanwhile, the renewed strength of the U.S. dollar in recent years is erasing what little sales growth WMT had to begin with. And after a long-overdue company-wide decision to lift wages, profitability is under assault.
Get this: Fiscal 2016 was the first time in 25 years that Walmart revenue decreased … and analysts expect the big box retailer to see sales fall again in fiscal 2017. No wonder WMT stock took a 30% haircut in 2015.
Unfortunately, there are no easy fixes to these problems. Walmart already hedges against currency risk, and foreign exchange fluctuations are entirely out of Walmart’s control. WMT can’t exactly change policies and start paying employees less, and it’s currently spending billions trying to catch up to AMZN in e-commerce.
That leaves the company little choice: Now it has to become more efficient.
We saw this conscious process begin in earnest in February, when WMT broke off its relationship with Murphy USA Inc (MUSA). Under their previous agreement, Murphy gas stations would pop up with new Walmarts. It was mutually beneficial: Murphy got traffic from Walmart customers, and Walmart got traffic from people driving by filling up their tanks.
Walmart would lease the land to Murphy, who would eventually buy it outright from Walmart. While WMT currently operates some of its own gas stations, it hasn’t been a focus for the company in the past — it would rather just outsource that to Murphy.
Not anymore. From now on, WMT will be operating its own gas stations, keeping the profits from those locations for itself. It’s a strategy Costco Wholesale Corporation (COST) uses.
Late last week, WMT made a similar move, announcing its intention to build a dairy processing plant that will produce milk for Walmart’s own private-label brand. The Indiana plant will eventually supply about 600 stores, or roughly 14% of U.S. Walmart locations.
The news hit shares of Dean Foods Co (DF), Walmart’s largest private label milk supplier previously, and DF stock slid 12%.
This is the second consecutive month that Walmart has moved to take previously outsourced lines of business in-house. I seriously doubt it will be the last, and I suspect there are other opportunities to assume more complete control of its private label businesses still out there. By doing so, WMT will be able to eke out some small margin improvements.
If that doesn’t sound exciting, that’s because it’s not. The bigger problem is Walmart’s stagnant top-line growth, which there simply aren’t any quick fixes for.
As I said, these are desperate times for WMT stock, and I think it’s a subpar stock for most investors’ portfolios.
If you absolutely must be invested in a discount retailer, consider Dollar General Corp. (DG) or Dollar Tree, Inc. (DLTR), which actually have meaningful growth prospects and should continue to benefit in a relatively soft economy.
As of this writing, John Divine was long AMZN stock. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
