Wal-Mart Stores, Inc. (WMT) just posted earnings that beat expectations, but investors shouldn’t see this as the all-clear to buy the retail giant. There are serious risks for WMT stock as we enter the holiday shopping season.
The fact remains that WMT stock has struggled amid weaker consumer spending among its core consumer audience and as rivals continue to compete on price. As proof of this, consider that while Walmart earnings beat on the bottom line, revenue missed expectations.
And while WMT stock reported same store sales growth in its most recent quarter, previous reports showed a string of ugly numbers, so the bar was pretty low. Revenue from Walmart stores open for a year or more had been flat or shrinking in each of the last six quarters before Q3 earnings hit Wall Street.
It all adds up to a decent showing now, but not a strong enough trend for investors to have confidence that holiday sales will be good enough to lift this retail giant.
Walmart Needs a Christmas Miracle
Looking deeper into WMT earnings, the retail stock projected full-year profits within a range of $4.92 to $5.02 a share. That’s disappointing considering Wall Street has a target of $4.99 a share, at nearly the top of that range.
But it shouldn’t be much of a surprise that Walmart isn’t impressing.
A recent panicked memo from higher-ups at WMT stock show there are serious concerns at the retail giant when it comes to the simplest stocking requirements. In a nutshell, Walmart saw a lot of meat and produce expire because it wasn’t stocking the grocery aisles and coolers properly. Simple things — like adding stock to the back or bottom of the case instead of up front, allowing consumers to grab older products that are close to expiration first — were not being done.
That doesn’t speak very highly of Walmart and its management if this no-brainer technique had to be mandated via memo.
It’s also not a good sign, considering that groceries are a huge part of the overall WMT stock strategy; more than half of revenue comes from groceries, and Walmart is the largest grocer in America based on sales volume.
At the same time, Walmart continues to invest in pricey e-commerce efforts — with some $1 billion spent this year and between $1.2 billion and $1.5 billion projected next year, according to company reports. That expense won’t necessarily pay off in time for Black Friday or Cyber Monday sales, where WMT will be competing with e-commerce giants Amazon.com (AMZN) and eBay (EBAY), among others, but certainly will be a drag on the bottom line as the company builds out in a big way for future online sales.
It adds up to a recipe for disaster when it comes to Q4 earnings and holiday sales, with a challenged grocery business and big capital expense for online sales that won’t pay off until down the road.
There’s a chance that WMT stock could be a buy in early 2015 based on improvements to these two areas. But if you’re buying now, you’re expecting a Christmas miracle where strong sales of toys and home goods and other items provide a tailwind for the struggling retailer.
That seems a tall order. To those who suggest buying Walmart before the holidays, I say “Bah, humbug!”
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP.
