Last week, the retail world got a rude awakening when the big four department stores flopped on their earnings reports. Macy’s Inc (NYSE:M), Kohl’s Corporation (NYSE:KSS), Nordstrom, Inc. (NYSE:JWN) and J C Penney Company Inc (NYSE:JCP) all put up negative comps. Their stocks were killed, as was the rest of the retail sector. This week, we hear from the biggest retailer of them all in Wal-Mart Stores Inc (NYSE:WMT).
I think Walmart’s earnings report will stand in stark contrast to what we heard from the big department stores.
Here’s why.
Forget Department Stores, Consumers Are Shopping at Walmart
Investors should look past the noise from weak department store earnings.
WMT stock is down since last week’s poor retail earnings, but I think the market is making a mistake there. Weak sales at traditional mall-focused department stores does not mean weak sales at big box retailers like Walmart.
Actually, it looks the two are inversely correlated. Over the last four quarters, the big four department stores (JWN, M, KSS and JCP) have all reported either negative or barely positive comps. Meanwhile, Walmart has reported strongly positive comps (>1%) in each of those quarters, fueled largely by impressive e-commerce growth. In fact, the last time the big four department stores reported positive comps across the board was in February 2016. That was also the last time Walmart’s U.S. comps rose less than 1%.
Overall, I actually think the weak department store earnings last week are a bullish signal for WMT stock this week. There is clearly a trend in shopping away from clothing-specific department stores and to off-price, one-stop-shops like Walmart. It looks like that trend sharply accelerated this quarter, and I am bullish on Walmart’s U.S. comps.
WMT Stock: All About E-Commerce and Grocery
For Walmart stock, the two biggest growth drivers are e-commerce and grocery.
And the company grew market share in both those categories last quarter.
On the e-commerce front, WMT rolled out “Pickup Discounts” in April. The company is offering discounts on online-only items in order to push the buy-online, pick-up-in-store model.
It appears to be working.
Web traffic analytics site Quantcast shows that walmart.com has seen a significant year-over-year increase in traffic over the past several months. Google Trends yields similarly bullish data, with search interest related to Walmart also showing strong year-over-year gains.
On the grocery front, WMT management has been excited about the growth in that market on the past several earnings calls. And with good reason. As convenience and price continue to dictate consumer shopping decisions, Walmart continues to transition into a fully stocked, omni-channel, off-price one-stop-shop. Grocery is a huge pillar of that transition.
This quarter, WMT cut prices on its groceries in 1,200 stores across the Midwest and Southeast. That undoubtedly pressured other grocers and grew Walmart grocery market share. Those price cuts might have pressured sales and margins in the quarter, but I think its more likely that WMT gained more than enough market share to offset those near-term adverse effects.
Bottom Line on Walmart Stock
Trends indicate the quarter was pretty good. Dollars leaving full-price department stores are flowing into stores like WMT. That is a secular trend that appears to be only accelerating, so that provides a natural sales tailwind into the foreseeable future. Meanwhile, Walmart is really starting to get its e-commerce game figured out and the grocery growth story looks as good as ever.
But the market is pricing most of this in. I think WMT stock pops strongly Thursday, but I also think it is just a trade here. At these levels, the valuation is extended and fundamental upside looks limited.
Walmart stock is trading at 17.3-times trailing earnings. That is as rich of a trailing valuation as it has received since early 2015 when the stock was up around $85 per share. By October 2015, WMT stock was trading under $60.
I don’t think we will get that same magnitude of a pullback in Walmart stock now, but the point is that the market is getting ahead of itself here. I’ll trade the stock for an earnings pop, but will fade that rally.
As of this writing, Luke Lango was long WMT and KSS stock.
