Wal-Mart Stores, Inc (WMT) Has More Problems Than the Trump Tariff

The growth has stalled -- and e-commerce means lower margins

By Tom Taulli, InvestorPlace Writer & IPO Playbook Editor

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It’s been brutal for retailers. Yet Wal-Mart Stores, Inc. (NYSE:WMT) has been able to buck the trend. Then again, the company has massive scale and has also been investing aggressively in its e-commerce platform. As a result, Walmart stock has logged a decent 7% return during the past 12 months.

So might there be more gains?

Well, for the most part, there are still major headwinds – and one is downright tough to gauge. That is, Donald Trump’s trade policies. So far, it looks like there could be a tariff of 5% to 10% on imports, which could be done fairly quickly with an executive action. The goal is to help spur manufacturing and promote an “America first” policy.

But it will likely make Walmart stock far from first. According to InvestorPlace.com’s James Brumley, the company imports about $50 billion in Chinese goods. While a tariff of 5% to 10% may not seem like a lot, it could still come to $5 billion.

This leaves WMT in a tough position, such as to make a decision on raising prices or take a hit on margins. And of course, the company’s margins are already razor-thin, with the net income representing about 3% of overall revenues.

It is not clear-cut if anything will happen, however. Let’s face it, the Republican party has a long history of being pro free-trade. So there will likely be considerable pushback. Oh, and there are many U.S. companies that will ramp up their lobbying efforts.

Regardless, all this uncertainty will probably be a negative for Walmart stock. If anything, expect lots of headlines that will cause anxiety for investors.

Other Problems With Walmart

Yet this is not the only nagging issue with Walmart stock. Keep in mind that growth has been lackluster. From 2012 to 2016, there was a mere 8% increase. Furthermore, during this period WMT was only able to churn out a gain of 16%. By comparison, Target Corporation (NYSE:TGT) logged a return of 47% and Costco Wholesale Corporation (NASDAQ:COST) posted nearly a 100% increase.

Part of the problem for WMT is that the revenue base is already massive, representing 7% of retail sales in the U.S. So it is downright tough to find revenue.

It also does not help that about 55% of U.S. revenues for WMT comes from the groceries. The business has suffered from deflationary pressures as well as tough competitive forces — with fierce rivals like Kroger Co (NYSE:KR) — as the industry has consolidated.

Bottom Line on Walmart Stock

Now it’s true that WMT stock might get a lift from e-commerce. In the latest quarter, the segment saw a 20.6% increase in global sales, which helped boost overall comparable sales by 0.50%. A major driver was the $3 billion acquisition of Jet.com, which is a leader in low-cost e-commerce transactions.

But WMT has also been making substantial investments in other countries, especially China. For example, the company has taken a 10% stake JD.Com Inc(ADR) (NASDAQ:JD), one of the country’s largest e-commerce operators.

All good, right? It’s encouraging.

Although, WMT still is does not provide specific sales and profit details on its e-commerce business. What’s more, it is important to note that — during the past couple years — there were declines.

For the most part, Amazon.com, Inc. (NASDAQ:AMZN) continues to grow at a rapid clip, as it is the top-of-mind choice for millions of consumers when it comes to e-commerce. The company also can provide rock-bottom prices — bolstered with the highly profitable cloud business — and there is the benefit of strong customer loyalty with Prime. As for Walmart stock, it is not only in the unenviable position of playing catch up, but there are the heavy costs of brick-and-mortar operations.

It’s a predicament that faces most traditional retailers. Just look at the serious problems with companies like Macy’s Inc (NYSE:M) and Kohl’s Corporation (NYSE:KSS), whose stock prices got crushed this week because of a disappointing holiday season.

Granted, Walmart stock has the advantage of an attractive dividend, at 2.9%, and the company will likely have a fairly stable revenue base. Yet there appear to be few catalysts for capital appreciation. Already the valuation seems far from cheap, with the forward price-to-earnings ratio of 16, which compares to TGT’s 13. In other words, it’s probably best to hold off on WMT stock for now.

Tom Taulli runs the InvestorPlace blog IPO Playbook and is a registered investment adviser representative (you can visit his site to learn more about his financial planning services). He is also the author of various books on investing like All About Commodities, All About Short Selling and High-Profit IPO Strategies. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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