Despite the entire market suffering since the start of the year, Wal-Mart Stores, Inc. (WMT) has managed to gain a respectable 9% year-to-date. The S&P 500, on the other hand, is still losing 2%.
With the gain so far, WMT stock seems to be recovering from the slump it went through in 2015. The slump in 2015 is largely attributable to concerns that the days of growth at WMT are gone.
But the gain WMT stock has seen in 2015 could send a signal that Walmart has already bottomed out. Does that mean it’s finally time to start piling into WMT again?
A lot of analysts have spoken about how revenue growth and comparable sales growth — or the lack thereof — are still wildly unattractive, as is Walmart’s profitability trend.
Let’s look at some numbers and see why they’re right about WMT stock.
WMT Stock Is Competing in the Wrong Arena
As I pointed out in a recent article about Amazon.com, Inc. (AMZN), a company’s operating income presents the clearest view of its profitability. That’s because the expenses that directly affect operations are already factored into those numbers.
Over the past three years, Walmart’s operating income has been on a decline. In fiscal 2015, operating income was $27.1 billion. By the end of fiscal year 2016, operating income had fallen to $24.1 billion — an 11% decrease in just a year.
By comparison, close competitor Costco Wholesale Corporation (COST), has been seeing its operating income improve over the same period. In its latest fiscal year, operating income actually gained 12% — a much different story than WMT’s loss.
That’s bad news for WMT stock because it means Walmart is spending more in dollar terms to earn its revenue.
WMT stock does have a turnaround strategy in place, but it doesn’t look like it’s working. Part of that strategy is to improve its ecommerce business. The retail giant is planning to spend about $2 billion dollars to improve its ecommerce segment by the end of fiscal 2017 … but that’s only going to worsen WMT stock’s profitability problem.
WMT stock wants to compete with Amazon for online shoppers. But Walmart is getting it wrong, because Amazon has effectively evolved to be way more than an online retailer.
First, with online shoppers always looking for the best deals, the margins in online retailing are so tight that it becomes unfeasible for businesses to look to the internet for profitability. Amazon itself is a big example of this.
Amazon has turned its ecommerce business into more of a platform of fueling growth in other business areas. By implication, Amazon will ultimately earn its real profits in those other businesses. On the other hand, WMT stock is just a retailer — period. It doesn’t have an alternate route to profits, so scaling up its low-margin ecommerce business won’t help.
If you’re looking for value in the brick-and-mortar retail space, WMT stock could have a compelling investment case.
However, it will never win in a race against Amazon in the online retailing space, which why profitability will continue to erode. Based on such a misguided venture, I wouldn’t own WMT stock.
As of this writing, Craig Adeyanju did not hold a position in any of the aforementioned securities.
