Shares in Wal-Mart Stores, Inc. (NYSE:WMT) started the year by hitting an all-time high, and investors probably figured the worst was behind WMT. How wrong they were.
WMT stock topped $90 a share in the first trading week of January. WMT stock’s holiday-selling season rally looked like it would extend well into 2015 after lagging the broader market for more than three years, but the rally didn’t last.
WMT stock has been in steady decline since setting that record high and is now off 9% for the year-to-date. Even the quiet S&P 500 has managed a price gain of almost 2% this year (See below a 52-week chart of WMT versus the S&P 500, Courtesy of S&P Capital IQ).
Whatever optimism fueled WMT stock through the holidays is now long gone. Indeed, Walmart shares are back to levels last seen in early November. No surprise there. Stocks follow profits, and Walmart profits are expected to be in decline for some time.
Currency woes are hitting all U.S. multinationals as the strong dollar makes goods more expensive overseas. Additionally, revenue generated overseas becomes less valuable when converted into dollars. WMT is having as hard a time as any blue-chip stock with that macroeconomic headwind.
Investments in e-commerce and higher wages for employees are driving higher costs, which are also pressuring the bottom line. The market likes it when companies fire people, not give them raises. So, that accounts for some of the drop in WMT stock. After all, higher costs — and stagnant sales — have put Walmart’s growth into reverse.
Analysts expect earnings to decline to $1.05 a share when Walmart reports quarterly results in mid-May. Indeed, declining profits are the theme of the year. Earnings are forecast to fall in the next quarter and in fiscal 2016, too.
To put falling earnings in perspective, even during a extended period of sluggishness for WMT, earnings still managed to grow more than 6% a year over the last five years. WMT has told investors they won’t be seeing anything like that again until 2017.
WMT Struggles With Slow Sales, Higher Costs
As mentioned above, the bottom-line weakness isn’t only about higher expenses. Revenue is barely growing either. True, WMT snapped a seven-quarter losing streak in U.S. same-store sales late last year, but that’s not the same thing as success.
Walmart’s same-store sales — a key measure of a retailer’s health and margins — grew just 0.5% for all of 2014. Globally, WMT same-store sales dropped 0.4% last year.
Adding to the worldwide slowdown is WMT’s go-slow approach in China. Originally, Walmart planned to jam out thousands of stores in that vast and growing market. However, a series of humbling missteps forced WMT to scale back its ambitions.
Walmart intends to open just 115 stores in China over the next couple of years. The expansion will bring its total store count in China up to 530. That’s not going to move the needle for a company with more than 4,000 stores in the U.S. alone.
The only way WMT can continually increase earnings is by adding more stores. The retailer’s low-price promise makes profit margins almost paper thin. With increasing competition from dollar stores to drug stores, WMT is stuck. Walmart simply can’t raise prices (WMT can — and does — pressure suppliers to cut prices).
The failure to make China a fountain of store growth and flagging U.S. operations make it hard to see how WMT is going to grow. Walmart has a checkered history with expansion in other overseas markets, too.
After the steady decline in WMT stock this year, shares are probably discounted enough to deserve a rating no worse than “hold.” WMT trades at about 15 times forward earnings, which actually looks like a bit of a bargain in today’s pricey market.
But that’s also damning WMT stock with faint praise. With no growth and market sentiment against it, Walmart looks to be stuck — at least until the holidays — once again.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
More From InvestorPlace
- Liquidate Lumber Liquidators (LL) From Your Portfolio NOW
- 5 Cinderella Stocks to Buy for Big Dividends
- 5 Stocks With Charts That Scream ‘Buy!’