- Nomura analysts have picked Walmart as their favorite retail play in 2016 based on low oil/gas prices.
- Walmart stock has badly underperformed the retail sector and the broader market in 2015 despite the company enjoying the benefits of low gas prices for much of the year.
- What other positive catalysts have good potential to make Walmart stock a good performer in 2016?
Nomura analysts have singled out giant retailer Walmart (NYSE:WMT) as their favorite retail low oil/gas play for 2016 saying the company’s core customers who earn~35k/year are a price-conscious lot whose purchasing behavior is strongly influenced by fuel prices. Nomura says that lower income demographics stand to benefit the most from the prevailing low gas prices, and lower gas prices may coax shoppers to shop more frequently at big stores such as Walmart’s. Nomura also says that Walmart’s huge private transportation fleet consisting 6,650 delivery trucks will realize significant cost benefits due to the ongoing gas price deflation.
Nomura’s latest low/gas sentiments really are nothing new from what we have been hearing from cross-section of analysts all year long. There is no denying the fact that Walmart and other big-box retailers such as Target (NYSE:TGT) have already started reaping the benefits of low gas prices as evidenced by Walmart’s current streak of five quarters of positive store traffic growth. Cowen analysts estimates that the low gas prices will result in cost savings of $60B-$80B for U.S. consumers in 2015 alone, the benefits of which are likely to be enjoyed most by the retail sector as well as the consumer discretionary sector.
But unfortunately, the retail sector has continued to badly lag the market, with Walmart not an exception. The SPDR S&P Retail ETF is down 9.2% YTD compared to a healthy 12.2% gain by the consumer discretionary sector and a modest 0.98% gain by the S&P 500. Meanwhile, Walmart stock is down 30% YTD while those by rival Target are down 3% over the period.
Walmart has badly underperformed both the retail sector and the broader market as higher wages and rising costs continue eating at its bottom line. But that’s only part of the narrative.
Weak ecommerce sales are Wal-Mart’s undoing
One of the other key reasons why Walmart stock has cratered badly during the current year despite an upswing in sales and shopper traffic is due to a pretty dramatic slowdown in the company's eCommerce sales. Wal-Mart recently revealed that it has been investing heavily in ecommerce initiatives, yet recent growth trends have been disappointing. Ecommerce growth usually has a tangible effect on Wal-Mart’s top line due to the fast growth of the sector compared to much slower growth by traditional brisk-and-mortar stores.
Investors are therefore genuinely concerned when they look at Wal-Mart’s ecommerce growth profile over recent quarters. Wal-Mart’s ecommerce sales growth has slowed down from 30% recorded during Q3 2013 to just 10% during Q3 2015. To get a clearer picture of how bad the situation has become, sample this: Wal-Mart reported a 1.5% increase in comparable sales growth during the last quarter, of which online sales had contributed 0.15% compared to the previous quarter where online sales had contributed a good 0.30% of Wal-Mart’s top line growth. Wal-Mart's online sales growth in 2015 alone has declined from 17% during the first quarter to 10% currently.
Wal-Mart’s online sales totaled $13.2 billion through the first nine months of the current year, compared to $71.8 billion by Amazon (NASDAQ:AMZN), yet Amazon reported 23% sales growth during the last quarter, demonstrating the huge gulf between the two companies. Wal-Mart remains the second-largest online retailer, but risks losing too much market share to its rivals if its online sales growth continues on its downward spiral.
But judging by recent analysts’ checks into Wal-Mart’s online business, the online weakness might soon become a thing of the past. Wal-Mart has sped up its free pickup service for online groceries bringing the number of stores that offer the service to 140 in 25 markets. Amazon also recently introduced a mobile check-in service that allows its shoppers to alert store workers whenever they are ready to pick their orders.
Here Wal-Mart has a good chance to take full advantage of its 4,500+ U.S. stores in lowering delivery costs for its customers to give them a better incentive to shop online. After all, studies have shown that ordering online costs 50% more than making in-store purchases. Wal-Mart stores are geared to handle in-store pickups of online orders by customers, with the recent opening of a 1-million square foot facility in Atlanta bringing its fully-optimized fulfillment centers to five.
But perhaps the biggest reason that makes us optimistic that Wal-Mart’s online sales growth could improve significantly in the coming quarters is the company’s much-improved dynamic pricing model. Dynamic pricing is Amazon’s way of adjusting the prices of its products on an almost daily basis as opposed to the everyday low prices that Wal-Mart has favored in the past, but which tends to lose its allure to customers rather quickly.
Amazon might be the king of dynamic pricing, but Wal-Mart is not far behind. 360pi, an ecommerce data firm, recently found that Wal-Mart online prices have lately remained within 5% of Amazon’s, and have been shifting with almost Amazon-esque regularity. The mere 5% difference between Amazon prices and Wal-Mart's is the best by any online retailer.
For instance, online channel checks by 360pi found that 16% of Amazon product prices fluctuated during Black Friday compared to 12% by Wal-Mart’s. On other days, Wal-Mart’s rapidity of price changes was found to equal Amazon’s. This suggest that Wal-Mart has been working hard to improve its algorithmic pricing to match the online leader’s.
Wal-Mart appears to have fine-tuned its online game, which could help the company reaccelerate its online growth. This might play a bigger role in returning Wal-Mart to investors’ good books than low gas prices alone.