Early this year, I called Wal-Mart Stores, Inc. (NYSE:WMT) the “McDonald’s of 2016,” comparing what might be happening there to the turnaround at McDonald’s Corporation (NYSE:MCD) under new CEO Steve Easterbrook. In fact, since January Walmart stock is up 11%. But it was up over 20% for the year in August — this was my point back then.
I felt Easterbrook had just done the easy things, like making breakfast all day, and that gains from there would be harder. McDonald’s stock is down 3% during 2016.
Once investors realized that McDonald’s problems were structural, not superficial, they walked away from the shares. That is happening to WMT stock, and for the same reason. The problems at WMT go deep, and they won’t be fixed quickly.
Management recognizes this, but that doesn’t make it comforting if you have money that wants a return now.
Structural Problems for WMT
Walmart’s suburban-style SuperCenter store format has reached market saturation in the U.S. At its investor meeting on Oct. 6, CEO Doug McMillon said the company would slow domestic store openings, and crack down on incidental expenses like travel, focusing instead on store operations.
WMT also has a demographic problem. The average shopper is 51, and about half earn under $50,000 per year. This is five years older, with $13,000 less in income, than the average at long-time rival Target Corporation (NYSE:TGT). Walmart shoppers are also less likely to be black or Hispanic than shoppers at rival stores, another troubling demographic sign.
Analyst Ken Goldberg wrote recently that Walmart stock has been flashing technical “sell” signals for a month and speculators are heading for the exits. He wonders whether this is a WMT problem or a general economic malaise setting in. It’s a Walmart problem.
With sales approaching $500 billion per year, WMT is a huge ship to turn around. It is still being haunted by a foreign bribery case resulting from its entry into Mexico, and recently rejected a settlement of that case. Walmart is a company haunted by its past.
Walmart Stock Has Strengths
WMT is becoming huge in the grocery space. This gives it an advantage over Target, but that company is no longer its target. And it has taken Walmart many years of concentrated effort, preceding McMillon’s tenure as CEO, to achieve this goal.
Now McMillon thinks WMT should be taking on Amazon.com, Inc. (NASDAQ:AMZN). This is why it recently bought Jet.com for $3 billion in cash, plus $300 million in stock incentives. As Jet executives take control over Walmart’s e-commerce operations, results may improve.
The problem is that, right now, WMT’s online operations don’t even beat Target, let alone Amazon. Delivery is slower, and less accurate, than from its smaller rival.
Walmart, in other words, has a long way to go to catch up as an e-retailer, and low prices alone won’t make up the gap. It has deep structural, operational issues that must be addressed, at scale, before it can begin to fulfill its promises.
Bottom Line on WMT Stock
McMillon warned two years ago that his turnaround would take time and he has been right. He has taken on Walmart’s reputation for poor pay, and those initiatives have proven enough of a success that he could brag about it in a commercial.
But giving checkers a small raise is a bit like making breakfast all day. It can provide a short-term boost to WMT stock’s earnings, allowing the people who work at the company to shop there. But it does not solve the underlying structural problems — demographic, operational or cultural — that still bedevil the company nearly three years into McMillon’s tenure.
As with Easterbrook’s McDonald’s, you’re going to want to avoid Walmart stock until you see real progress on these structural issues.
Dana Blankenhorn is a financial journalist who dabbles in fiction, his latest being The Reluctant Detective Travels in Time. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he owned shares in AMZN.
