Walmart (WMT) stock is up about 14% this year despite lackluster growth, as investors move to safer assets amidst a dodgy global economy. Walmart is the world’s largest company by revenue, and the Bentonville-based giant sells 165% more than Amazon (AMZN), Target (TGT) and Costco (COST) combined.
But Walmart faces some challenges ahead, including strong competition and stagnant sales. Should investors buy WMT stock right now?
WMT: Stock Pros
Wal-Mart Stock is a Recession Hedge: Wal-Mart stock is an excellent hedge against the threat of a recession. The S&P 500 fell 37% in 2008, but Wal-Mart stock was up 19.53% in 2008. Wal-Mart competes on price, and if consumers find their purchasing power pinched by a downturn, they may shop more at Wal-Mart rather than WMT’s competitors such as Kroger (KR).
Investing in e-commerce: Wal-Mart announced in October last year that it would invest $2 billion in its e-commerce infrastructure over the next two years. Wal-Mart is doing so in order to compete better with the likes of Amazon.
This capex will drag down free cash flow for the next two years. However, once the transition is completed and Wal-Mart slows its investing, WMT will have more money available for dividend hikes. These investments will bear fruit sooner or later, saving Wal-Mart money and enabling it to compete with AMZN and Target.
Wal-Mart is also adjusting to the shift to mobile; half of Wal-Mart’s online orders last year came via the WMT mobile app.
Low Fuel Prices=More Disposable Income for Consumers: Oil prices haven’t been this low in over a decade, and crude oil futures are languishing around $40/barrel. This is good a net positive for WMT stock, since lower prices at the pump mean more money can be spent shopping. Bloomberg Intelligence reports that the average driver will save $38 a month on fuel.
Nomura analyst Robert Drbul is optimistic on WMT stock, calling it his “favorite oil-and-gas play.” He notes that Wal-Mart shoppers earn around $35,000 a year, and spend a higher portion of their disposable income on fuel than other consumers.
WMT Stock Cons
Stagnant Sales and Earnings: Wal-Mart saw sales decline year-over-year in fiscal 2016, which hasn’t happened in the 45 years the stock has been publicly traded. Indeed, WMT sells nearly half a trillion dollars worth of goods a year, so it will be difficult to grow such a behemoth at the double-digit rates seen a few years ago.
Walmart’s earnings fell as well, down to $4.57 a share in fiscal 2016 from $5.05 in fiscal 2015. Worse, EPS may shrink further, with analysts projecting a 38.43% decline over the next 5 years.
While Wal-Mart used to expand at a rapid rate, the firm is now closing stores. In January, Wal-Mart announced that it would close 269 stores this year, with 154 of them in the United States.
Increasing Competition: Wal-Mart, the biggest of the big-box retailers, once displaced smaller mom-and-pop retailers which lacked WMT’s size and bargaining power. Now, it seems that the tables may have turned, with Amazon dominant in e-commerce, discounters such as Aldi expanding in the United States, and Costco taking on Sam’s Club. Increased competition will leave WMT investors with thinner margins.
Aldi, the German retail giant with 10,000 stores worldwide, is planning to more than triple its store locations in the United States from 600 to 2,000 in the years ahead. Aldi has been a formidable competitor to Walmart’s Asda grocery chain in the UK, so Aldi’s U.S. expansion will be a headache for WMT shareholders.
There are more problems ahead. Amazon is expanding into the grocery business with Amazon Fresh. If the e-commerce juggernaut is able to do to grocery stores what it did to bookstores such as Borders and electronics retailers, WMT will be in serious trouble, since 56% of Wal-Mart’s sales are in the grocery division.
Higher Labor Costs: Wal-Mart has the third biggest workforce in the world, with over 2.2 million employees worldwide and 1.4 million in the United States. Naturally, higher labor costs will exact a toll on WMT’s bottom line. Wal-Mart has raised wages this year, and the average hourly rate is now $13.38 an hour.
Wages could increase further. California is moving to increase the minimum wage to $15 an hour by 2022. The governor of New York favors similar action, and New Jersey could be next.
Minimum wage increases will hurt Walmart stock, but have little effect on Costco, which already pays employees $13 an hour minimum.
Walmart Stock: Verdict
The retail sector is going through some disruption, and it remains to be seen how big-box chains such as Wal-Mart will fare. Wal-Mart faces increased competition, which will lower WMT’s margins. Higher labor costs will put pressure on earnings as well. While WMT stock may be a recession hedge, investors should stay put for now and watch to see how well Wal-Mart navigates this transition.
As of writing, Lucas Hahn did not hold a position in any of the aforementioned securities
