Wal-Mart Stores, Inc. (NYSE:WMT) still has some tough challenges ahead. But Thursday’s early-morning surge in Walmart stock following a solid second-quarter earnings report says something telling and inspiring:
The market finally sees more reward than risk in owning a piece of WMT.
Last quarter, the world’s largest retailer earned an operating profit of $1.07 per share on sales of $120.9 billion. Factoring in adverse currency exchange rates, revenue would have grown 2.8% to $123.6 billion. Analysts collectively expected WMT to earn $1.02 per share on sales of $120.34 billion, so that’s a beat on both ends.
Walmart stock holders also had to be encouraged by the comparisons. Namely, Walmart earned $1.08 per share on $120.23 billion in sales. So Q2 marked the eighth straight quarter of year-over-year revenue growth.
Same-store sales were expected to rise 1% — by analysts as well as the company — matching the first quarter’s comps growth rate. WMT pleasantly surprised on that measure too, however, logging same-store sales growth of 1.6%.
All told, it marks a lot of progress on an effort that had yet to bear much fruit.
Walmart’s Overhaul Effort
Walmart stock began facing a brisk headwind in 2013 (fiscal 2014), forcing the company to make changes on multiple fronts.
One of the retailer’s bigger sore spots has been its e-commerce division. It has been losing ground to Amazon.com, Inc. (NASDAQ:AMZN), partially because Amazon is good, and partially because Walmart didn’t allocate enough resources to its digital sales venue. That changed late last year. WMT announced it would spend an additional $2 billion on its e-commerce platform over the course of 2016 and 2017. More fulfillment centers and online grocery shopping were among the focal points.
It didn’t help much initially. Walmart’s e-commerce growth rate continued every quarter since the first quarter of 2015, falling to only 7% for the first quarter. Last quarter, though, digital sales grew 11.3%. Gross merchandise volume was up 13% compared to Q2 of a year earlier.
It was progress at a time investors needed to see it.
The recent $3.3 billion acquisition of Jet.com could provide another much-needed jolt to Walmart’s e-commerce engine. The deal, however, has raised more questions than it has answered, most of them focusing on any integration and associated timelines.
All the same, most observers are enthusiastic about the deal’s potential. Nomura analyst Jessica Schoen Mace commented, “We believe the broadline retailers have higher vulnerability to online competition, but view Walmart’s acquisition of Jet.com as a positive development in the company’s e-commerce strategy.”
Walmart has also upped its payroll spending.
After years of labor-related headaches (mostly a lack of pay), Walmart acquiesced. In April of last year, 500,000 employees saw their hourly pay ramp up to $9, then 1 million workers got a bump up to $10 per hour in February of this year.
Though arguably necessary, owners of Walmart stock have seen those pay raises take a toll on the bottom line. Last year, CFO Brett Biggs warned investors the initiative could shave $1.5 billion off this year’s bottom line, and so far, the number doesn’t seem implausible. During the first quarter, selling and administrative expenses grew by $1.4 billion, or 6.3%, though revenue was only up 1%. For Q2, selling and administrative costs were up 4.6%, to $25.2 billion.
Not Everything Is Hunky-Dory, Though
Walmart has continued to struggle at finding a winning mix of formats and product focuses.
Earlier this year, Walmart chose to abandon its smaller-footprint “Express” stores, announcing it would be closing all 102 of them in the foreseeable future. It’s wading even deeper into the neighborhood grocery market, though. And at the same time, WMT is rolling out curbside grocery pick-up service at more and more stores. All told, online grocery shopping is now available in 60 markets and nearly 400 stores.
Focusing on food may not be a bad strategy in that it has already proven to be a big growth driver. In fact, between 2008 and last year, grocery sales drove all of the growth its U.S. unit produced during that period.
Not everyone is fully convinced Walmart is on the right track, however. UBS explained last week:
“Ultimately, we think investors are optimistic about the company’s recent labor initiatives and its efforts to improve its grocery operations in the U.S. At the same time though, they’re waiting to see sustainable results before rewarding the company with a higher multiple. For now, we believe there are more attractive opportunities elsewhere within the hardline/broadline retail universe.”
Looking Ahead for Walmart Stock
WMT upped its full-year outlook, now estimating adjusted per share earnings between $4.15 to $4.35 for fiscal 2017. Projected GAAP earnings of between $4.29 and $4.49 will be lowered by approximately 5 cents in the fourth quarter due to the acquisition of Jet.com. The pros are predicting an average profit of $4.27 per share of Walmart stock for the full year, on $486.5 billion in revenue.
Walmart did not offer any current-quarter outlook in its press release, but analysts are calling for a profit of 93 cents per share on $118.45 billion in sales for the quarter currently underway.
The takeaway for Walmart stock holders?
This is the first time in a long time that the top and bottom lines both have a plausible shot at moving higher.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
