Ugly Walmart Earnings Only the Start of Pain for WMT Stock

This retail stock is doomed to low margins and continued declines

Walmart Inc. (WMT) just suffered its worst single-session decline in 15 years after predicting continued pressure on earnings. Specifically, WMT stock predicted a 6% to 12% drop in fiscal 2017 profits — that is, from January 2016 to January 2017 for those unfamiliar with the corporate calendar.

walmart WMT Stock   A New Walmart Is Born (With All Problems Intact)Considering Walmart stock analysts were expecting a mid-single-digit increase in profits, that was a simply miserable thing to hear.

Of course, should we be surprised? As I wrote recently, Walmart is just the worst. We’ve seen chronic underperformance from Walmart stock over the last several years, and 2015 has been even worse, with WMT stock now down about 30% from Jan. 1.

This poor performance has been driven by poor fundamentals, as a focus on low prices demands Walmart keep margins minuscule and pressures on its core customer (that is, low-income Americans) continue to create headwinds to its top line. Well-intentioned moves to raise wages for employees and give its stores a makeover haven’t helped profitability, either, and as evidenced by a flat sales growth forecast for the year, they seem to have failed to increase the top line, too.

Remember that nearly two-year stretch of declining same-store sales across 2013 and 2014? That is the face of the new Walmart, and regardless of any press releases to the contrary, there hasn’t been any remedy to this trend.

Walmart Earnings Validate Sustained Downtrend

Everyone knew the trouble this mega retailer was facing, and Walmart earnings simply validated that trend.

But the million-dollar question for WMT stock holders is whether the declines have finally been large enough to account for all the negativity, or whether future weakness lies ahead.

My opinion is that more pain is in Walmart’s future.

For starters, no campaign about a better store environment will pay dividends immediately. Better-compensated employees and cleaner stores won’t easily undo the big brand problems Walmart faces in the minds of many consumers who prefer to shop at Target (TGT), Kohl’s (KSS) or TJX Companies (TJX). While it may be wise for WMT stock to invest in changing these perceptions long-term, any turnaround will take lots of time here.

Besides, it’s worth admitting customers aren’t exactly looking for a premium shopping experience at Walmart locations. I mean, key competitor Costco (COST) boasts bare concrete floors and is quite literally just a warehouse full of stuff. The war is being fought on price, so any moves Walmart makes to improve experience still must be aligned with its proposition of providing the lowest prices out there … and that’s a tough spot to be in.

Throw in the fact that consumer spending might not be all it’s cracked up to be in general, with last year’s crucial Christmas sales season winding up as a big disappointment in regards to retail sales, and it’s hard to imagine anything but a miserable Q4.

With challenges to profitability and investor sentiment firmly negative, I wouldn’t bargain hunt at this retailer now.

There might be a dead-cat bounce in the near future after this ugly Walmart earnings report, but don’t confuse that with the chance of a rebound.

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

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