WMT Stock – Is Wal-Mart Stores, Inc. the “Best of Breed” in Retail?

WMT dished out a pleasant surprise, but "better" isn't the same as "good"

Did Wal-Mart Stores, Inc. (WMT), of all companies, just rekindle some faith in the foreseeable future of retailing?

This certainly appears to be the case, and just in time too. After a streak of disappointing earnings results last week from many of the nation’s high-profile store chains, and with echoes of Wednesday’s poor Q1 numbers for Target Corporation (TGT) still ringing, traders were ready to mentally thrown in the towel on the whole industry.

The better-than-expected Walmart earnings report has them rethinking that worry.

And yet, current and would-be owners of WMT stock may not want to overlook the fact that, despite the impressive beats of top and bottom line expectations, total income as well as per-share income were lower on a year-over-year basis. The business could still use some tweaking.

Walmart Earnings

Last quarter — the company’s first fiscal quarter of 2017 — the world’s largest retailer earned $3.1 billion, or 98 cents per share, on $115.9 billion in revenue. Same-store sales grew 1%.

The pros were only looking for a top line of $112.7 billion, and a profit of 88 cents per share of WMT. That’s the good news. The bad news is, revenue only grew 0.9% from last year’s Q1 top line of $114.8 billion, and profits fell from the year-ago tally of $1.03 per share of WMT stock.

CFO Brett Biggs commented on the results:

“We are proud of the overall results in the first quarter, and there is momentum in many parts of the business. Based on our views of the global operating environment, and assuming currency exchange rates remain at current levels, we expect second quarter fiscal 2017 earnings per share to range between $0.95 and $1.08. Additionally, we expect comp sales for Walmart U.S. to be about +1.0 percent, and Sam’s Club, without fuel, to be slightly positive for the 13-week period ending July 29, 2016.”

Wall Street was only expecting a per-share profit of 98 cents for the second quarter, on average.

Drilling Deeper Into the Numbers

Though investors chose to see the glass as half full rather than half empty, glaring concerns remain.

One of them is e-commerce. While Walmart has made a deliberate and expensive effort to stop bleeding online business to rival Amazon.com, Inc. (AMZN), e-commerce revenue was only up 7% last quarter. That’s the fourth straight quarter the year-over-year growth pace of the retailer’s online sales has fallen.

Worse, international revenue fell 7.2%.

Conversely, U.S. sales at Walmart stores grew 4.3%, and Sam’s Club revenue was up 1%. Neighborhood Market same-store sales were up a hefty 7.1% last quarter, confirming the company’s move deeper into the grocery business.

The company’s decision last year to raise its internal minimum wage to $10 per hour at least partially explains weaker profits despite higher sales. Operational expenses were up 107 basis points last quarter, significantly crimping a relatively thin though not atypical (for retail) profit margin. Between higher payroll costs and ongoing technology/e-commerce investments, operating income fell 7.1% overall, and was off 4.6% on a constant-currency basis.

Cash flow — operating as well as free cash flow — both grew on a year-over-year basis. All the same, the company maintains the current year’s per-share income will roll in 12% lower than last year’s figure.

Bottom Line for WMT Stock

Last quarter’s results from Walmart were indeed a pleasant surprise. A relative victory doesn’t change the fact that on an absolute basis, though, Walmart is still pointed in the wrong direction, with investments and people still not paying off as needed. The company still has a lot of work today, and it remains unclear if it will be able to turn things around in a meaningful way.

On the other hand, with WMT shares valued at a palatable forward-looking price-to-earnings ratio of 15.9. And considering it offers more hope than any other retailer, it could be considered the “best of breed” retailer right now.

Just keep it on a short leash.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/05/wmt-stock-walmart-earnings-report/.

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