Wal-Mart Stores, Inc. (WMT) just posted ugly first-quarter earnings that missed expectations. WMT stock is down about 5% over the past few days as a result, bringing the total pain for Walmart stock holders to an 11% loss year-to-date in 2015 vs. a gain of about 3.5% for the S&P 500.
Specifically, WMT reported revenue of $114 billion, down slightly from last year and shy of about $115.6 billion in projected sales. Earnings of $1.03 per share were also down from last year, and missed forecasts of $1.05.
Some in the anti-minimum wage camp will be quick to claim WMT stock has validated concerns that higher worker pay is a bad idea and will harm corporations. But the details show it wasn’t just the bump to a wage of $9 per hour in April that caused trouble by itself; a stronger dollar and continued sales declines returned as the same old drags for WMT stock.
And given that those persistent issues don’t look like they are going away — and the fact that Walmart has committed to lifting wages again, to $10 per hour next year — hints that WMT stock is not a bargain buy here; it remains a sell.
WMT Stock Still Struggling
Walmart has undeniably been stuck in a rut for some time. Remember, only in November was WMT stock able to snap its ugly streak of same-store sales declines that lasted almost two years.
The problem, which has been dissected at length on InvestorPlace and elsewhere, is that Walmart has relied on low-income customers for so long that it has to compete on price alone. And sadly for WMT stock holders, Costco Wholesale Corporation (COST) and Amazon.com, Inc. (AMZN) have become quite adept at competing with Walmart on price.
Also, while it’s bad enough that affluent shoppers see Walmart as lowbrow, it’s core customers also are quick to leave when times are good. When lower-income Americans start to get a little more cash, they take that money elsewhere to stores like Target Corporation (TGT) and Macy’s, Inc. (M) instead of boosting sales at their local Walmart.
It’s a lose-lose situation, and will require some significant long-term changes to resolve.
That’s actually why investment in wages could be the right move for WMT stock, retaining better employees to improve the customer experience. Or similarly, why Walmart is planning big investments in e-commerce such as its recently launched $50 unlimited shipping service to compete with Amazon prime.
But the sad reality is that these moves will take time. And meanwhile, weak sales are likely to persist and currency exchange rates should remain unfavorable as dollar stays strong — and could get even stronger as rates move higher.
That all seems to indicate that things will get even worse for WMT stock before they get better. So if you are thinking of buying a dip here, hold off … and if you haven’t already sold, think seriously about alternatives that could deliver a much better long-term return.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at firstname.lastname@example.org or follow him on Twitter via@JeffReevesIP. As of this writing, he did not hold a position in any of the aforementioned securities.
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