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Walmart Inc Stock Is a Hot Bargain After Post-Earnings Drop

The weakening growth trend in online sales was always going to happen, but it's still a strong pace

By James Brumley, InvestorPlace Feature Writer

Walmart Stock Remains Boring Even As Online Sales Growth Excites

Source: Mike Mozart via Flickr

Based on little more than the headlines and Walmart Inc’s (NYSE:WMT) response to them, it would be easy to conclude that WMT stock is in serious trouble. Perhaps last quarter’s results and this year’s outlook were finally enough to convince Walmart stock owners that Amazon.com, Inc. (NASDAQ:AMZN) and/or Target Corporation (NYSE:TGT) had finally figured out a way to stop the world’s biggest brick and mortar retailer in its tracks.

Or, perhaps once all the dust settles and the market has more than a few hours to think about the company’s fourth-quarter results, investors will realize the 9% tumble we saw in the WMT stock price on Monday isn’t an indication that the company is on the ropes.

WMT Stock: Earnings Recap

For the quarter ending in January, Walmart turned $136.3 billion worth of revenue into an operating profit of $1.33-per-share.

The good news is, analysts were only expecting a top line of $134.9 billion, and the retailer only generated sales of $129.7 billion for the comparable quarter a year earlier. The bad news is, those same pros were modeling a profit of $1.37-per-share of WMT stock for the recently ended quarter. Still, same-store sales in the United States were up 2.6% versus expectations of 2.2%.

The stumbling block: Walmart’s e-commerce revenue growth slumped to only 23%, marking the third consecutive decline in quarterly online sales.

CEO Doug McMillon commented on the fourth quarter numbers:

“We have good momentum in the business with solid sales growth across Walmart U.S., Sam’s Club and International. We’re making real progress putting out unique asses to work to serve several customers in all the ways they want to shop.”

That’s an accurate statement too. Foot traffic at its U.S. stores was up 1.6% last quarter, and the average purchase size grew 1.0%. Sam’s Club traffic grew 4.3% for the quarter, though the average ticket size fell 1.9%. Excluding the beneficial changes in exchange rates, sales at its international locales collectively grew 2.9%. The metrics all suggest is culling the stores that need to be shuttered and extracting more business from the stores that remain open.

Reality Check

The knee-jerk selloff from WMT stock us understandable, particularly in light of the fact that the stock had been trading at a trailing price-to-earnings ratio of nearly 30. Although few would argue that the Walmart of today is remarkably more potent than the Walmart of just a few years ago, Walmart stock itself was priced for near perfection. An adjustment needed to be made, and the e-commerce slowdown and the earnings miss was the excuse investors needed.

On the flipside, expecting the company to maintain e-commerce revenue growth in excess of 50% was an unfair expectation.

A little over a year ago, WMT turned up the heat on its online effort in a big way, committing $2 billion to that division in an effort to keep rival Target on the defensive, and to win back some of its market share lost to Amazon. Although some evidence of that investment materialized in the fourth quarter of the previous year, it reached full speed in the first quarter of last year when online sales grew 63% year-over-year.

We’re now making comparisons to results that had already benefited from the ramped-up investment, however. We’re also seeing the adverse impact of stepped-up efforts from Amazon and Target to keep Walmart’s online sales in check.

The end result is a price war, and not just in terms of per-item pricing. All three organizations are generous in terms of offering free shipping to their online customers, ultimately crimping the bottom line.

An added expense? Absolutely, but also an expense that’s worth incurring. Ditto for its added payroll expenses stemming from increased wages. Although the move has added costs, it has also increased employee engagement.

More than anything though, the red-hot online sales growth rates of two and three quarters ago were never going to last, nor did they have to. Even at 23%, it’s still pretty impressive.

Looking Ahead for Walmart Stock

Yes, online sales growth is slowing down. That was never not going to happen though. Clearly some investors are shocked that it has, but that shock will soon subside and most observers will realize that the world’s biggest retailer remains on the right path.

The hints are in the guidance the company offered for the fiscal year that just began. Walmart is looking for same-store sales growth in the United States of at least 2.0%, and growth of between 3.0% and 4.0% for its Sam’s Club stores. Moreover, it expects many of its initiatives in place right now to drive a 40% improvement in online sales for the full year. That should all be enough to produce profits of between $4.75 and $5.00-per-share of Walmart stock, versus only $4.42-per-share last year.

In other words, this dip in the WMT stock price should have you looking at it as a bargain, if you’ve been waiting for a better time to buy it.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.

Article printed from InvestorPlace Media, https://investorplace.com/2018/02/walmart-inc-wmt-stock-hot-bargain/.

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