A rough stretch for Walmart Inc (NYSE:WMT) has turned worse of late. Even with a modest rebound of late, the WMT stock price has dropped about 23% from late January highs. A 3%+ drop following last week’s announcement that the company had acquired Indian e-commerce provider Flipkart sent Walmart stock to a seven-month low.
The driver of the decline, which has almost totally wiped out a 40% run in Walmart stock that started last October, has been weakening sentiment toward the company’s e-commerce business.
Backed by acquisitions like the 2016 purchase of Jet.com, Walmart seemed like it was becoming a real competitor to Amazon.com, Inc. (NASDAQ:AMZN). But a disappointing Q4 ended that narrative and has sent the Walmart stock price tumbling.
The Flipkart acquisition isn’t going to assuage investor concerns on that front. In fact, it’s raised those concerns. WMT stock lost 3% on the news, meaning its market capitalization fell over $7 billion. Walmart only is spending $16 billion to acquire its 77% stake of the company.
But the reaction to the Flipkart deal isn’t just about Walmart’s prospects in India. It’s about the company’s struggles in a number of areas over a number of years. And the decision to pay up (reportedly outbidding Amazon for the unit) shows that Walmart itself either hasn’t learned its lessons or that it has no other choice.
Struggles in the Core Walmart Business
The business that has made Walmart the world’s largest retailer is starting to stall out. That’s reflected in the fundamentals and in the stock price. Walmart stock has risen just 7.6% over the past five years.
Looking at the numbers, it’s not hard to see why. Revenue actually declined year-over-year in fiscal 2016 (ending in January of that year). Excluding fuel, same-store sales growth was 1.3% in 2016, and 2.1% in 2017.
The U.S. market looks saturated from a brick-and-mortar standpoint: total square footage across all of Walmart’s formats has grown roughly 1% a year the past three years. The Sam’s Club concept is shrinking, losing share to Costco Wholesale Corporation (NASDAQ:COST).
Revenue growth for the core U.S. physical business is simply tepid. Meanwhile, margins are being pressured. Operating income has declined for three consecutive years. The company specifically highlighted its wage increase as the major source of margin pressure in its most recent 10-K.
At this point, Walmart simply has to find new avenues of growth. The old days of 3-4% comps and 8-10% EBIT increases look to be in the past. To be fair, it’s not all Walmart’s fault.
Walmart stock actually has outperformed that of rival Target Corporation (NYSE:TGT) over the past five years, if modestly so. Shares of Kroger Co (NYSE:KR) hit a three-year low last year before a recent rebound.
Walmart is not immune to the same pressures facing brick-and-mortar retailers of all stripes, notably the consistent, sharp growth of online sales led by Amazon. But that means it needs to find its growth elsewhere and that could be a problem.
Buying Online and International
From that standpoint, buying an online overseas retailer would seem to be a smart move. But the problem for Walmart is that it’s basically the only move, and it’s a strategy that Walmart has struggled with in the past.
Notably, Walmart hasn’t had a ton of success in international markets. Its Mexican subsidiary, Wal-Mart de Mexico S A B de C V (ADR) (OTCMKTS:WMMVY) has established a solid business, with the Mexican-traded shares rising about 35% over the past five years. Elsewhere, though, the news hasn’t been nearly as good.
Walmart struggled in Germany, spending billions before eventually withdrawing. It’s backing away from the UK and Brazil markets at the same time it enters India, as Dana Blankenhorn pointed out. Overall international results have been stagnant, and actually modestly negative, over the past few years, though the stronger dollar has had an impact.
Even in India, Walmart has been trying for years to enter the market, only to be mostly stymied by regulators. Now, its Flipkart has to take on Amazon, which already is taking market share in that country.
Do investors really want to bet that will be a winning strategy for Walmart? It’s already behind Amazon stateside. The Jet.com acquisition looked brilliant when WMT neared $110 per share; after recent results, it looks more like an acqui-hire, as Jet.com’s operations and strategy are folded into Walmart’s branded operations.
The risk with Flipkart is that it combines two areas (ecommerce and international expansion) where Walmart, to put it nicely, hasn’t shown a ton of success in its history. And so what happens if Flipkart continues to lose to Amazon?
The Walmart Stock Price Still Could Be Too High
What happens is that Walmart stock becomes re-rated for its lower growth potential and, even after a 20%+ decline, still could move lower. A ~16x forward P/E is within the company’s recent range; if investors start pricing in minimal or even negative profit growth, that in turn could move toward the 12-14x level. There, the WMT stock price would dip below $70.
That seems perhaps too cheap for a company of Walmart’s size. But bear in mind that TGT received a 10-11x multiple until its recent rally. And it’s not hard to see the narrative surrounding Walmart stock swinging even more negative.
Another disappointing result on the e-commerce front with Q1 earnings on Thursday could cement the idea that ecommerce is only going to be a modest contributor to revenue and have a negative impact on margins.
Any early struggles in India leave the company reliant on China as its last real growth opportunity. Shares of its key partner there, JD.com Inc(ADR) (NASDAQ:JD), are trading near a 52-week low amid profit concerns.
To change the narrative, Walmart is going to have to post a big report on Thursday that shows a new path for growth. I’m skeptical that’s on the way and if it’s not, the recent decline in the Walmart stock price could have further to go.
As of this writing, Vince Martin has no positions in any securities mentioned.