More Upside in Walmart Stock?
If you were betting on a solid earnings report from Wal-Mart Stores, Inc. (NYSE:WMT) stock, good for you. After posting quarterly earnings on Thursday morning, Walmart stock gained as much as nine percent after market open.
However, good news doesn’t always come for the multinational retail giant. Looking back a little further, the market had some concerns for Walmart stock. Even after this morning’s surge, the stock is still down 9.9% in the past 12 months.
So, will the rise in WMT stock be just a one-time event or will this mark the beginning of a new rally?
No one can predict the market. However, judging by the fundamentals, I’m leaning towards a bullish call on the company.
You see, in today’s earnings report, Walmart demonstrated one of the most critical strengths of the company—it could be recession-proof.
We hear that term a lot, but for a company to really demonstrate its ability to do well when times are tough, it needs to show that on the financials. Moreover, it also needs to prove that it can do better than its competitors.
Well, that’s exactly what Walmart did. In the retail sector, comparable store sales are often used to measure a company’s performance. In the most recent quarter, Walmart’s comparable sales edged up one percent, marking the seventh consecutive quarter of positive comparable sales. The rise in sales was driven by the sixth consecutive quarter of positive traffic, which increased 1.5% this time. (Source: “Walmart Reports Q1 FY17 EPS of $0.98, EPS and Walmart U.S. Comp Sales Exceed Guidance,” Wal-Mart Stores, Inc., May 19, 2016.)
But those were just results from the past. What really cheered up investors was what the company said about the future.
Brett Biggs, the executive vice president and CFO at Walmart, said, “we expect [second quarter] comp sales for Walmart U.S. to be about plus one percent.” (Source: Ibid.)
What’s so special about that? Take a look around and you’ll see what I mean.
Another retailer—Target Corporation (NYSE:TGT)—reported its earnings on the same day as Walmart. While Target’s comparable store sales also increased in the quarter, the same cannot be said about its guidance. Looking ahead, Target said that its comparable sales could drop by as much as two percent. This sent TGT stock falling on Thursday morning. (Source: “Target Reports First Quarter 2016 Earnings,” Target Corporation, May 18, 2016.)
And let’s not forget Macy’s, Inc. (NYSE:M), which reported last week. The retailer’s comparable store sales on an owned plus licensed basis declined by 5.6% in the first quarter. The company’s outlook is dismal as well, with Macy’s expects comp sales to fall by three to four percent in fiscal 2016. (Source: “Macy’s, Inc. Reports First Quarter Earnings Per Share of 37 Cents,” Macy’s, Inc., May 11, 2016.)
In an era when other retailers are projecting declining business, Walmart is showing its resilience. That’s what makes Walmart stock special.
The nature of the company’s business certainly helps. Even though economic recovery has been well underway in the U.S., consumers are actually becoming thriftier when they go shopping at physical stores.
Of course, the biggest threat to Walmart and to all retailers right now is not recessionary pressure; it’s e-commerce giant Amazon.com, Inc. (NASDAQ:AMZN).
Nowadays, Amazon offers almost everything you need on its e-commerce platform. When you can get household items, clothing, and even fresh groceries from Amazon, why go to a physical store?
Well, Walmart knows this issue. That’s why it has been expanding its presence in the e-commerce world as well.
Walmart has expanded its online offerings and started operations at new fulfillment centers. It now offers more than 10 million stock keeping units (SKUs) on Walmart.com and is growing that number through both first-party and third-party items. On a constant currency basis, Walmart’s e-commerce sales grew seven percent in the first quarter, while gross merchandise volume (GMV) grew 7.5%. (Source: “Management Earnings Call Transcript,” Wal-Mart Stores, Inc., May 19, 2016.)
The Bottom Line on Walmart Stock
And let’s not forget WMT stock’s valuations. Trading at $68.81 per share, the retail company carries a price-to-earnings multiple of 15X. It also pays dividends with a quite handsome yield of 3.08%.
Given its positioning in the retail market, the company could be more recession proof compared to its peers. If it manages to address its challenges on the e-commerce side, we might be able to see more upside in Walmart stock.