Wal-Mart Stores Inc (NYSE:WMT) enjoyed a high level of growth in 2017. The company created buzz with an e-commerce platform that showed they were addressing the threat posed by Amazon.com, Inc. (NASDAQ:AMZN). This increase pushed the WMT stock price from the $65 per share range in early 2017 to almost $100 per share by the end of the year.
However, before this increase, Walmart suffered under a poor reputation for worker treatment and failure in foreign markets. With a relatively high PE ratio, Walmart appears set to return to stagnation as old problems again come to light.
E-commerce Successes Revived WMT Stock
Walmart has quieted critics and helped boost the WMT stock price with its move into e-commerce. After acquiring Jet.com along with many smaller operations, Walmart has gained new product lines and e-commerce expertise. With this expertise, the company produced a compelling combination of online and physical store shopping.
It also allows delivery and in-store pickup of items only available online. And because 90% of Americans live within 10 miles of a Walmart, customers can see or try on goods before placing online orders. Earnings had flatlined for the last few years. Now, analysts forecast double-digit earnings growth for the remainder of the decade.
All retail stocks have suffered under the sentiment that, “Amazon was going to take over.” However, many forget that in the 1990s, that same feeling applied to Walmart.
In the late 20th century, Walmart steadily gained market share from retailers such as J C Penney Company Inc (NYSE:JCP), Sears, and K-Mart (which are both now under the Sears Holdings Corp (NASDAQ:SHLD) umbrella). Moreover, a well-designed supply chain, lower prices and dominance in both rural and urban markets made Walmart the king of retail by the 1990s.
WMT stock Growth Is Limited
Sadly for holders of WMT stock, founder Sam Walton failed to impress his retail philosophy on future management teams. After Walton died in 1992, the Walmart juggernaut began to unravel. Stories of poor worker treatment began to emerge. Also, a greater focus on cutting cost steadily hurt the quality of their goods.
Moreover, attempts to export Walmart’s strategy outside of North America met with multiple failures. Market conditions forced highly publicized exits out of Germany and Brazil.
And despite an early entry into the market, only 439 Walmart stores had opened in China as of 2016. This compares with over 6,300 stores for Walmart in the U.S., a country that’s one-fifth the population of China.
Now that Walmart has executed a viable online strategy, the focus will return to these old problems. Growth remains a serious concern. Walmart stores are reaching a saturation point in the United States. And due to its failures in foreign markets, moving into other countries promises limited success at best.
Moreover, compared to other retailers, Walmart’s carries a price-to-earnings (PE) ratio at over 26 times earnings. Archrival Target Corporation (NYSE:TGT) trades at 14 times earnings, and its dividend yield remains almost twice as high as that of the WMT dividend.
Macy’s Inc. (NYSE:M) has an 11 PE, while Nordstrom, Inc. (NYSE:JWN) sells at a multiple of just over 16. Only Costco Wholesale Corporation (NASDAQ:COST) at almost 30 times earnings compares well. However, Costco has posted higher growth numbers and still retains store-growth prospects both at home and abroad.
Concluding Thoughts on WMT Stock
Now that Walmart has addressed e-commerce, its high PE ratio and ongoing issues will slow growth in WMT stock. Its online success has breathed new life into Walmart. Due to higher online sales, analysts expect the double-digit growth enjoyed in the past to return for a time. Unfortunately for Walmart, e-commerce remains the only apparent growth prospect.
The company still suffers from a reputation for poor working conditions and an obsession with cost. Moreover, with a saturated U.S. market and a record of failure outside the U.S., limited options remain to add stores. Most other retailers trade at a lower PE ratio. Investing in the stock of others in the retail space will likely bring higher rates of return.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.
