Walmart (NYSE:WMT) has seen its shares rally since early March, but WMT stock is still worth less than it was to kick off 2021. Despite the setback this year, WMT has managed to post growth of 117% over the past five years. Are the next five years going to be a repeat, rewarding investors with triple-digit gains? Or could we see a return to the long drought between 1999 and 2011, when WMT stock hit a plateau and stalled?
There’s no shortage of investment analysts who see Walmart surging, especially as the pandemic eases and shoppers flood back into stores. I don’t buy into that narrative. If you are looking for stocks that are likely to surge as consumers open their wallets, I have some suggestions. When it comes to Walmart, signs point to growth coming to a grinding halt. WMT stock is currently rated as a “D” in Portfolio Grader, reflecting the company’s current situation. Here’s why I’m not looking at WMT’s current weakness as a buying opportunity.
A Holiday Quarter Miss Doesn’t Bode Well
For the first month and a half of 2021, WMT already seemed to have hit a plateau. Shares were actually trading below November levels — which I suspect will turn out to have been the peak of WMT stock’s five-year growth run. On Feb. 17, the company reported fourth-quarter earnings, and the market lashed out. WMT stock dropped 6.5% the next day.
It’s not that Walmart didn’t post some good numbers. The company reported record Q4 revenue of $152.1 billion, and same store sales were up 8.6%. Its online sales were up 69% year-over-year.
However, the company posted a loss of 74 cents per share, compared to earnings of $1.45 per share the previous year. Walmart blamed that on losses at its Japanese and European operations. Even excluding these items (which would bring EPS to $1.39), the company still would have missed analyst expectations of $1.51 per share. Those online sales grew at the slowest pace since the start of the pandemic, and due to the larger labor costs involved in packing orders and curbside pickup, Walmart says its e-commerce effort is still not profitable.
In addition, the company announced it is increasing capital expenditures in 2021 to $14 billion. That’s up significantly from the usual $10 billion to $11 billion range. The company also warned that revenue growth is expected to slow this year.
Pressure for Employee Wage Hikes
Walmart announced that it is increasing average worker wages to $15. That sounds like the company is complying with President Joe Biden’s push for a $15 minimum wage. But it’s not. Walmart’s move means that by giving 425,000 employees a raise, its workforce of 1.5 million will be paid $15 an hour, on average. The company’s actual starting minimum wage remains at $11. According to a report in Bloomberg, the January move to an average $15 wage will hit Walmart’s annual operating income in the U.S. to the tune of 14%.
That is not a small number. Walmart remains under pressure to move their minimum wage to $15, which would have an even bigger impact. And as long as it resists, the company will continue to feel pressure from advocates and consumers that could impact sales. Either way, the $15 minimum wage seems likely to be a drag on WMT stock.
Bottom Line on WMT Stock
As I mentioned at the start of this post, Walmart still has its fans among the investment community. At the Wall Street Journal, the polled investment analysts have WMT rated as overweight.
I’m more inclined to side with R5 Capital’s Scott Mushkin, who downgraded WMT stock to a “sell” at the end of January with a $131 price target. After touring 40 of Walmart’s supercenters in multiple states, Mushkin cited a slew of issues including stocking problems (both over-stocking and under-stocking), a subpar customer experience, problems with freshness in the grocery area, and the need for capital investments. Addressing these challenges will require expenditures. That, in turn, will put pressure on earnings, margins, and Walmart’s share buyback capability.
Add in challenges like the growing pressure to significantly boost employee wages, and the picture just isn’t pretty for Walmart for the foreseeable future. I’m not saying that Walmart stock won’t return to growth again. I expect it will. But that could take a while. in the meantime, WMT stock has no place in a growth-focused portfolio.
On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
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