Wal-Mart Stores, Inc. (WMT) stock is off to a great start this year after a terrible 2015 and its momentum will continue as it shakes off the problem it faces from changes to government food stamp programs.
Changes to the Supplemental Nutrition Assistance Program — more familiarly known as SNAP — are rolling out gradually, but the bottom line is that fewer Walmart shoppers will qualify for benefits.
Cuts to the food program could hit as many as 1 million WMT shoppers, and analysts expect them to leave a mark on WMT’s top line. By one forecast, SNAP cutbacks will shave anywhere from 0.4% to 0.6% off WMT’s all-important same-store sales.
That may not sound like a lot, but it could actually be enough break the company’s streak of six consecutive quarters of rising same-store sales. In the most recent quarter, Walmart’s U.S. comparable-store sales rose 0.6%.
Same-store sales are a key measure of a retailer’s health because anyone can grow revenue by opening more stores, which are costly. Squeezing more sales out of existing stores leverages those investments in expansion.
Walmart Stock Has Bigger Issues to Deal With
So why is this no big deal for WMT stock? Because it’s a light headwind compared with the company’s other issues that the market has apparently baked into the share price.
Stagnant wage growth, a rising dollar and competition from Amazon.com, Inc. (AMZN) and Target Corporation (TGT) are the real worries, and the market looks like it’s happy with the way WMT is tackling them.
Sure, it’s expensive to raise wages, expand e-commerce and close underperforming stores, but investors seem to have embraced these strategic moves as investments in the future.
None of these moves come without risks, but based on the performance of WMT stock this year you could say that they’re already priced in. Walmart stock has been a market-beater this year. It’s up 12% so far in 2016. The S&P 500, meanwhile, is flat on a price basis.
This comes after Walmart stock lost almost 30% last year. And before 2015, shares were range-bound for two years. But now the market appears to be more confident in Walmart and its turnaround story, and so sentiment has changed. You can see this in WMT’s trailing price-to-earnings multiple, which hit a low of about 12 near the end of 2015. Today, WMT goes for almost 15 times forward earnings.
Anything that dents Walmart same-store sales is a bummer — of course it is. But it doesn’t have to resonate with the market when WMT can afford the hit, has bigger problems weighing on shares and it’s not a surprise.
Walmart might have 99 problems, but SNAP ain’t one.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
