To say Wal-Mart Stores, Inc. (NYSE:WMT) shares have been all over the map since late 2014 would be an epic understatement. After falling 29% in 2015 and rallying 18% for 2016-to-date, Walmart stock has vexed the bulls just as much as the bears.
And yet, its current price of $72.44 puts WMT right back where it was in late 2012 … four wasted years, as investors have never been able to discern if the world’s biggest retailer is backpedaling or just making ugly forward progress.
Thursday morning’s second-quarter results announcement should shed a little more light on what has become a massive revamp effort. Even then, though, Walmart remains a work in progress.
Walmart Earnings Preview
As of the most recent look, Walmart is expected to earn $1.02 per share on sales of $120.16 billion. That top line would be a tad bit under the $120.23 billion reported in the same quarter a year earlier, and income would be notably lower than the profit of $1.08 per share of Walmart stock posted in Q2 of 2015 (fiscal 2016).
Same-store sales are projected to rise 1%, matching the previous quarter’s same-store sales growth rate.
Although Walmart stock remains the undisputed king of retail, WMT’s bottom line growth hasn’t been all it was hoped to be of late; margins have been plummeting since 2014. Last year, revenue actually slumped, for the first time in a decade.
Some of the fiscal headwinds were out of the company’s control. Amazon.com, Inc. (NASDAQ:AMZN) has become an increasingly formidable competitor, for instance, in a world that’s increasingly enamored with doing everything online.
On the other hand, many of Walmart’s woes were self-inflicted. Sloppy inventory management led to habitually empty store shelves, it didn’t invest adequately in its e-commerce platform early enough to compete with Amazon and its less-than-great pay for hourly workers has, since been amped up, forcing higher payroll expenses Walmart stock owners haven’t been accustomed to seeing.
Whatever the case, the retailer has spent the last year or so finding ways to make it all work, and there’s a light shining at the end of the tunnel.
WMT: Three Things to Mull
Although there are still several factors that can and will push Walmart stock around for the foreseeable future, three aspects of the company’s business are going to be doing most of the driving.
- E-commerce: The 800-pound gorilla in the room is Walmart’s e-commerce business. The company finally got serious about it last year, and although the pace of year-over-year growth slowed to only 7% in Q1, there’s plenty of reason for hope on this front. Indeed, there may even be reason for outright optimism. While questions about the upside are still bouncing around, the recent acquisition of Jet.com gives Walmart a tool it can really use to compete with Amazon.com.
- Payroll expenses: Although it’s no longer news, the pay raises Walmart put in place beginning earlier this year for most of its hourly employees are still taking a relative toll on YOY payroll expenses. It was the honorable thing to do, but it’s not yet clear if the retailer has been able to extract any additional value from its investment in its workers. The YOY comparison should be a tough one again.
- Store concept mix: It’s no big secret that Walmart is running out of places to build its superstores. Its plan to sidestep that problem two years ago was the establishment of smaller stores to compete at the neighborhood level with the likes of Dollar General Corp. (NYSE:DG) and Dollar Tree, Inc. (NASDAQ:DLTR). As it turns out, that game plan wasn’t exactly bulletproof either. The company announced earlier this year it was closing all 102 of its Express stores. It still believes in dedicated grocery stores, but it’s not clear if the organization knows for sure where the bulk of its growth is going to come from.
Bottom Line for Walmart Stock
Investors may want to keep their euphoria in check should WMT roll out an impressive beat on Thursday. Conversely, don’t sweat a shortcoming.
Walmart is still a work in progress, and it could take another year for the blossoms to show up in earnest. Thursday’s report will just indicate how effectively the retailer is at revamping itself.
As UBS explained it late last week:
“Ultimately, we think investors are optimistic about the company’s recent labor initiatives and its efforts to improve its grocery operations in the U.S. At the same time though, they’re waiting to see sustainable results before rewarding the company with a higher multiple. For now, we believe there are more attractive opportunities elsewhere within the hardline/broadline retail universe.”
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
