Shares of Wal-Mart Stores, Inc. (NYSE:WMT) have been trading sideways for two years, and there was nothing in its quarterly report to suggest WMT will break out of that trend, whether it’s to the upside or down.
The world’s largest retailer missed Wall Street estimates in the most recent quarter, thanks to higher wages, a stronger dollar and lower-income consumers concerned more with paying off debt than splurging at WMT.
Sales misses — particularly in same-store sales — rattled the market. Walmart stock fell more than 4% on the news.
These WMT results, like so many others before them, show that the company is stuck — in some ways because of forces beyond its control, but stuck nonetheless.
At first, the key issues hampering WMT and Walmart stock throughout the recovery have been joblessness and stagnant wages. And even though hiring has picked up, wages gains remain repressed.
There’s also been a big change in American attitudes toward spending, as Walmart’s sales help show. The huge drop in gas prices offers U.S. consumers billions of dollars in savings. In the past, businesses could count on consumers spending those savings on discretionary items, but no more. Rather than go shopping with their gas savings, Americans have been paying down debt or squirreling it away under the mattress.
WMT customers tend to be especially sensitive to changes in the price of gas, and that makes the retailer’s failure to benefit from the change particularly painful.
Currency Is Killing WMT
Perhaps management should take some of the blame for not being able to part consumers from their extra disposable income, but other challenges are beyond the power of any U.S. multinational to fix.
WMT derives about a quarter of its total sales from international markets, and the strong dollar is taking an axe to those receipts. It’s also getting worse. WMT now sees unfavorable foreign exchange costing the company $14 billion in revenue this year, up from a prior forecast for $10 billion.
There’s nothing WMT can do about forex, and its investments in its employees, infrastructure and systems are certainly defensible. Between raising wages and building out its e-commerce platform, costs are going to be headwinds for earnings for the next couple of years. But as investments in the business, they will probably prove to be worth it.
In the meantime, anyone holding Walmart stock is going to have to accept disappointing earnings reports like the last one. Profit fell 6% to $3.34 billion, or $1.03 per share. EPS missed analysts’ average estimate by a penny, according to a survey by Thomson Reuters. It’s worth noting that forex cut earnings per share by about 3 cents.
Revenue also missed Wall Street estimates, albeit by a smaller margin. Sales were essentially unchanged year-over-year at $115 billion vs. a forecast for $116.3 billion. Once again, currency effects sliced $3.3 billion from the top line.
Most damaging, U.S. same-store sales — or sales at stores open at least a year — missed the Street’s target, rising 1.1% against projections of a 1.5% gain. Domestic same-store sales are an important indicator of a retailer’s health and do not suffer from the effects of foreign exchange.
Whether the market blames Walmart itself or the punishing macroeconomics for its problems, neither look to ease soon. Walmart will be investing in itself for two years, and no one can predict what will happen in the currency markets.
Under these conditions, more sideways trading for Walmart stock is the most likely path for shares.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.