It’s not often you see a company report an earnings, revenue and guidance miss on Wall Street and its shares initially trade higher. However, that’s exactly what happened with Walmart (NYSE: WMT) stock this week.
Walmart wasn’t immune to a difficult holiday season, but Walmart stock was. Investors seem to realize Walmart is one of the few companies in the retail sector that can actually thrive in the Amazon.com (NASDAQ: AMZN) era.
The first takeaway from Walmart’s quarter is that the company didn’t live up to high expectations. The retail giant reported earnings per share of $1.38 on revenue of $141.67 billion in the fourth quarter, missing analyst expectations of $1.43 and $142.49 billion, respectively. U.S. same-store sales growth was 1.9%, short of Wall Street’s 2.3% consensus estimate. Walmart also reported 35% online sales growth.
Looking ahead to fiscal 2021, Walmart guided for EPS of between $5 and $5.15, short of analyst estimates of $5.22. Walmart also guided for 30% online sales growth this year. Walmart told investors it will likely take a hit from the coronavirus outbreak in the first quarter. However, it said the impact is difficult to quantify at this point and is not included in its guidance.
Yes, the fourth quarter numbers and guidance weren’t as good as many investors of Walmart stock had hoped. Yes, the coronavirus will likely weigh on the first quarter. But given those negatives, Walmart’s quarter was relatively good compared to the rest of the retail sector.
Same-store sales growth was positive. Net income was up 12.1%. Despite heavy investments in store remodels, delivery services and online sales, gross margins in 2019 were 24.1%, down only slightly from 24.5% in 2018.
The Bigger Picture for Walmart Stock
The reason why investors didn’t flinch following the poor fourth quarter is likely because nothing changed the long-term narrative for Walmart stock. Walmart is not the typical stock in the typical market sector. Retailers that can’t keep up with Amazon have been dropping like flies for years. Walmart and others have had to scramble and invest heavily and aggressively to keep up. Those aggressive investments have eaten into profits.
But because not every retail competitor out there is willing or financially able to update to an online/omnichannel model, the competition in the physical retail space is actually shrinking. Some retailers are filing for bankruptcy and disappearing all together. Many are trying to downsize their way out of their problems by closing more and more stores.
Either way, any company that is growing its footprint in today’s market is gaining market share, at least in the brick-and-mortar space. The total number of Walmart stores grew from 7,909 in 2009 to 11,766 in 2019. Walmart’s growth has certainly slowed, but as its physical retail competitors are dying, Walmart is scooping up their customers.
Amazon has been bleeding the retail sector dry, but certain pockets of the sector are relatively protected. One of the most protected parts of the sector is the discount retail group. Dollar stores have thrived in recent years. In fact, Dollar General (NYSE: DG) stock has more than doubled the return of the overall S&P 500 in the past five years.
Bank of America analyst Robert Ohmes says American consumers are much more focused on prices today than in previous economic booms. In addition, low-income shoppers are increasing their spending more than higher-income shoppers.
Ohmes says this trend is the core of his “Discount Store Decade” thesis. He says discount retailers like Walmart, Target (NYSE: TGT), Dollar General and others have a decade of outperformance ahead. Ohmes states:
In our view, TGT, WMT, COST & DG should benefit the most from continued ‘Discount Store Decade’ (DSD) tailwinds, including favorable demographics, strong new home sales, competitor store closings, omni-channel success, alternative & digital profit streams, and a still strengthening low-to-middle income consumer that supports potential trade-up & basket inflation in the value retail channel (particularly in the Southeast & West).
In other words, while overall retail sales are shifting from offline to online, consumer spending is also shifting from high-end to low-end. And Walmart is top dog among brick-and-mortar discount retailers.
How to Play It
Holiday sales, coronaviruses, trade wars and recessions are all problems that short-term traders must lose sleep over. For long-term investors, Walmart stock is a top play on discount retail that trades at a very reasonable 22.9 forward earnings multiple. Thirty years ago, the best advice for Walmart stock investors was probably to buy it and forget about it. In 2020, I think that advice is as good as ever.
Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. Mr. Duggan is the author of the book “Beating Wall Street With Common Sense,” which focuses on investing psychology and practical strategies to outperform the stock market. As of this writing, Wayne Duggan does not hold a position in any of the aforementioned securities.