Wal-Mart Stores, Inc. (WMT) may be the world’s biggest retailer, and at one point it was able to throw its weight around and muscle its way to growth, but that’s not the WMT of late.
Perhaps due to its sheer unwieldy size against a backdrop of e-commerce’s venture into the consumer staples arena, revenue growth for the company has slowed to a crawl over the past two years, and already-thin profit margins have become even thinner thanks to the added expense of company-wide pay raises.
Something has got to give, and soon.
Fortunately, owners of Walmart stock have recently seen a handful of upgrades in the way the WMT does business; including, taking a step backward in order to take a bigger step forward. Unfortunately, the fiscal upsides of those efforts aren’t expected to benefit last quarter’s top and bottom line.
WMT Earnings Preview
As of the latest look, for the quarter that ended on April 30 (the company’s first fiscal quarter of 2017), Walmart is expected to report earnings of 88 cents per share on $113.22 billion in sales.
Both are notably lower than their year-ago comparisons of a profit of $1.03 per share of Walmart stock and sales of $114.83 billion.
Same-store sales are expected to have grown only 0.5%.
Jefferies commented on the upcoming WMT earnings announcement:
“Shorter-term we think sales remain modest and EPS should be attainable after substantial downward revisions, but we remain concerned about online conversion and mediocre sales growth versus competition, weak international results and more recently the risks associated with grocery deflation.“
Jefferies’ analysts are on target with their concerns.
Three Things to Think About
While Walmart’s success or failure is rooted in a variety of things, the future of WMT stock tends to be driven by only a small handful of the company’s most pressing issues and initiatives. Below are the three biggest matters current and would-be owners of Walmart stock may want to get a good grip on before and after Thursday’s earnings report (and most are in line with Jefferies’ concerns).
1. Walmart Pay
Although it has been around for a while, WMT has only recently turned up the heat on expanding the usage of Walmart Pay … an alternative to phone-specific digital wallets like Apple Pay or Android Pay.
It matters for a couple of reasons. One of them is that credit card and debit card users tend to spend more than cash-spending shoppers do.
The other big reason Walmart Pay is important to the company’s success is that it allows the retailer to understand fully consumer’s spending habits. It seems minor, but that’s the kind of customer that can be well leveraged.
2. E-commerce
There’s no denying Walmart simply missed the boat when it came to online shopping, letting rival Amazon.com, Inc. (AMZN) gain a little too much market share — and mindshare — before finally pushing back in a meaningful way beginning about a year ago.
The effort since then has paid off, more or less, but in the previous quarter its e-commerce growth pace still slowed … to a rate of only 8%. Given the amount of money spent to bolster its online business, that was a relative disappointment. The salt in the wound is the fact that Amazon continued to outgrow Walmart’s e-commerce machine.
The recent introduction of free two-day shipping for club members willing to pay $49 per year could help, but it may prove a costly maneuver.
If Walmart is to thrive in the foreseeable future, it has to do better here, and it has to start proving it has not wasted time and money developing its online platform. A glimmer of hope on this front Thursday could be huge.
3. Shrinking Its Way to Success
It sounds counterintuitive, and admittedly, it already has crimped the top line. But, Walmart is still in the midst of a complete corporate overhaul that focuses on quality over quantity. The new mindset has forced some tough but smart decisions, but the company may still need to take a few steps back in order to take more steps forward.
Case in point: Earlier this year, the retailer announced it would be closing 269 stores. Most of the 154 stores slated for closure in the United States were the smaller-format Walmart Express stores, which turned out to be less fruitful than initially imagined. While it’s wise to pull the plug on what’s ultimately a losing proposition, revenue still takes a hit as a result.
It’s not just a slowing store-count growth that hurts, however.
Walmart is making some tough decisions inside its stores as well. In April, it announced it was dropping Wild Oats brand of organic food. Most observers feel the company just didn’t see enough fiscal success with the brand to justify its ongoing presence on the stores’ shelves, even though Wild Oats is a respected draw for fans of organic food.
Look for more of the same kinds of tough decisions in the future.
Bottom Line for Walmart Stock
While Walmart was one the undisputed kings of retail, the last few years have turned it into a “show me first” kind of stock, meaning investors are no longer willing to pay a premium for WMT shares based on what it might be able to do in the future.
After a couple of lackluster years — the latter of which should have at least somewhat benefited from improvement initiatives — it’s time to start seeing real growth. Thursday’s announcement could be a real make-or-break event.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
