Walmart Inc. (NYSE:WMT) had investors cheering earlier this year. And I got an awful lot of hatemail for pointing out that, despite the recent good third-quarter results, WMT stock should be avoided. I believed the results were just a blip on the radar in an overall slow-growth situation, and that consequently, WMT stock was outrageously overpriced.
And now, frankly, there is no way to read WMT stock Q4 results other than “slow growth with underlying weakness.” I took some time to look at the numbers more carefully, and there is really very little to be cheery about. So get the hatemail ready.
Q4 Results Look Bad for WMT stock
On the surface, domestic same-store sales were up 2.6%, which was the 14th consecutive quarterly increase. Traffic at domestic stores was up 1.6%, and the average ticket rose 1%. Consequently, revenue grew 4.1% to $136.3 billion.
When I zeroed in on operating income,however, there are some real concerns. Operating income for the quarter, in constant currency, came in at $4.4 billion down almost 30% from last year’s $6.2 billion.
Two factors here are of concern. First, net sales increased $5.4 billion but cost of sales increased $4.9 billion. Second, operating costs increased by almost $2.2 billion. This is because Walmart stock now has to compete for its life with Amazon.com Inc. (NASDAQ: AMZN).
On an annual basis, operating income also fell about 10% to $20.4 billion.
The problem is that these operating income declines have become a trend. This trend is not going to change, in fact it’s probably going to get a lot worse. Not only that, the sales increases that we’re seeing –and operating income and margins themselves — are most likely due to jet.com.
WMT Stock Is Leaning Too Heavily on Jet.com
Investors went wild with the results from jet.com in recent quarters, but the most recent quarterly growth increase was “only” 23%. And WMT stock sold off. What WMT stock investors are missing is that jet.com was not the answer to Walmarts problems, but simply a necessary move for the company to remain competitive.
Jet.com will certainly help WMT stock in the near term, and maybe even the medium term. Over the long term, however, Walmart has tremendous overhead and is a traditional brick-and-mortar retailer in a world increasingly moving towards e-commerce.
After we back out a loss on the extinguishment of debt of $3.14 billion, we find what is at the core of my bearish thesis. Net income for last year came in at about $13 billion even. That is down from $13.64 billion the previous year. Net income is shrinking for Walmart stock. There’s no other way around this.
Bottom Line for WMT Stock
We invest for growth not for declining net income.
Walmart stock is a market cap of $260 billion, which means it trades at 20 times net income. Why is anybody paying 20 times earnings for stock whose earnings are shrinking? Walmart stock only pays a 2.34% dividend. You can buy any number of preferred stocks that yield three times that amount with far less risk.
So send the hatemail. Walmart stock doesn’t have a leg to stand on.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years’ experience in the stock market, and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
