If the legendary retailer Sam Walton were alive today, he would certainly be stunned by the performance of the company he founded, Wal-Mart (NYSE:WMT). Over the past 10 years, the annual average return has been a measly 1.7%.
But as the world’s largest retailer, should Wal-Mart be able to do better? It definitely has many benefits. It has the scale to extract great terms from vendors and its cash-flow generation is enormous. The dividend yield is also a decent 2.8%.
Should investors consider buying shares? Let’s take a look at the pros and cons:
Pros
New ideas. Wal-Mart is in the early stages of launching a small-store format concept called Wal-Mart Express.
No doubt, the company has reached a high degree of saturation in large markets. But with a small-store strategy, Wal-Mart can potentially find new growth opportunities. Besides, small stores have lower costs and higher returns on capital.
Global expansion. This is key to Wal-Mart’s growth strategy. To this end, the company has been aggressive with its acquisitions. For example, it has purchased a majority stake in Massmart, which is a top retailer in Africa. The continent represents a big opportunity and it looks like Wal-Mart will now have a strong foothold.
E-commerce. This market should continue to grow at a hefty rate for the long haul. To benefit from this trend, Wal-Mart has been investing more in its digital strategy. Consider that the company has an online system to allow customers to pick up items. There is also a move to provide for the delivery of groceries via an online system.
Cons
Traction. For the past two years, the same-store growth rate in the U.S. has been declining. It’s a scary statistic. Unless it is corrected, it will be extremely difficult for Wal-Mart’s stock to get traction again.
Competition. The discount category has been red hot. In other words, Wal-Mart now has to contend with many competitors. These include Family Dollar (NYSE:FDO),
Target (NYSE:TGT) and Costco (Nasdaq:COST). These companies have been successful in providing a wide assortment of products at fairly low prices.
There is also competition from e-commerce operators, especially Amazon.com (Nasdaq:AMZN).
Inflation. Higher gas prices are taking a toll on Wal-Mart. Essentially, it means that its customers will put off the purchase of discretionary items.
Verdict
Wal-Mart is taking smart moves to improve its operations. However, in light of the company’s massive size – which is over $400 billion in revenue – it will take time to make a material impact.
In the meantime, Wal-Mart still faces some tough challenges. These include competition, a sluggish economy and weak same-store sales growth.
Even though the valuation is attractive – at 11 times earnings – the cons still outweigh the pros on the stock.
Tom Taulli’s latest book is “All About Short Selling” and he has an upcoming book called “All About Commodities.” You can find him at Twitter account @ttaulli. He does not own a position in any of the stocks named here.
