As far as records go, it wasn’t one that Walmart (WMT) was hoping it would ever break. Nevertheless, it happened — Walmart stock booked its biggest-ever single-day drop on Wednesday, losing more than 8% of its value.
The prod for the pullback was a concerning warnings from the world’s biggest retailer. Simply put, Walmart announced this morning that the coming year’s earnings would drop rather than grow thanks to a combination of expenses and a currency headwind that continue to chip away at its bottom line.
Is it a case of low-balling, ensuring the company can handily top its whittled-down estimates? Or, is Walmart truly in trouble?
Realistically, the answer is somewhere in the middle, though owners of WMT may be able to take some solace in the likelihood that this “alarming” outlook has more bark than bite.
Buckle Up for a Rough Couple of Years
The bomb was dropped at the retailer’s “Investment Day” conference with analysts and the media. In the press kit prepared for the event, the company said it has widened its near-term sales growth outlook from a range of 1% to 2% to a range of nil to 3% growth. Through 2019, however, Walmart expects an annualized revenue growth pace of between 3% and 4%.
That’s not bad, but that’s also not the whole story.
The same presentations that told the market to plan for sales growth also told investors to prep for falling earnings. For the current year ending in January, the company expects earnings to roll in between $4.40 and $4.70 per share of WMT, versus the analyst consensus of $4.72. Beyond that, Walmart believes per-share earnings will fall between 6% and 12% in the coming calendar year (fiscal 2017). In fact, the company sees earnings pressure all the way through fiscal 2019, when it said it’s apt to start growing per-share income again at a pace of between 5% and 10%.
The reasons for the declining revenue projections come as no real surprise. That is, a company-wide wage increase, investments in store improvements, and expenditures laid out to beef up the company’s e-commerce sales are becoming expensive.
All told, Walmart will spend an additional $1 billion in payroll this year as a result of the wage increases, and they’ll cost about $1.5 billion more than they did in 2013 during the coming year. After that, the added expense will have been cycled through for more than a full year.
Yet, that’s not the biggest expense Walmart is incurring. The discount retailer spent more than $12 billion on technology and store make-overs last year, and plans to spend another $11 billion.
The capital expenditures should slow down considerably after that, although the added payroll expense is going to linger in perpetuity. But, as was noted, the upside should offset the downside by 2018 (fiscal 2019), when income per-share of WMT is expected to start rising again.
Walmart Stock Boiled Down to One Key Question
The market clearly went ballistic when it heard the news, upending WMT by 10% … and that’s in addition to the 26% slide Walmart stock suffered between early January and Tuesday.
While superficially it was an understandable response, for a well-watched stock by a (usually) forward-thinking investing public, it’s curious that traders didn’t embrace the idea of investing now for even more growth in the future. Indeed, CEO Doug McMillon plainly said:
“What’s clear is (Walmart is) embracing digital investments to become more and more seamless in omnichannel; this is the right thing to do for the very long term, in our view, but again it contributes to lower operating profit dollar confidence for the next few years.”
He made comparable comments regarding the wage increases and store overhauls. So, why such a pessimistic response? Edward Jones’ analyst Brian Yarbrough may have summed up the impasse perfectly, saying, “What if these investments don’t lead to better sales? That’s the biggest question.”
He’s right. And, judging from the action WMT dished out in response to Walmart’s plans, investors are anything but convinced all of this spending will be worth it in the end.
Just for the record, though, this reporter is willing to give Walmart the benefit of the doubt … here in the shadow of a 30% pullback year-to-date and a game plan that makes more sense than anything else the company has put on the table in the past several years.
Indeed, Wednesday’s bar looks like a major capitulation.
Walmart Earnings Preview
Many of the headwinds and responses discussed above are already in place and therefore should already be evident in the company’s numbers. To that end, the current quarter’s earnings report due in mid-November could be quite telling.
As of the latest look, the company is expected to report income of 99 cents per share on $118.1 billion in sales. Both are down from year-ago Q3 levels, when the retailer earned $1.15 per share of Walmart stock on sales of $119 billion.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
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