- Grocery growth illustrates that the retailer is winning back the US consumer. Groceries make up almost 60% of Wal-Mart's business.
- WalMart has decided to better the consumer experience in its existing stores. I think this is a prudent move as it will lay the foundation of how new openings will operate.
- E-commerce slowed to a 10% growth rate which was a disappointment. Grocery momentum should help e-commerce as they very much go hand in hand.
- Wal-Mart hasn't had a good start in China with respect to its physical stores but e-commerce is where the company is now investing . If the company can gain online market share here, the growth rates should be high due to rising incomes and a lack of physical stores among all the major retailers.
Walmart (NYSE:WMT) stock rose well above $60 a share as a result of Walmart earnings topping expectations in its latest quarterly report. Earnings per share came it at $1.03 which was well ahead of the $0.97 predicted on the street. Revenues came in slightly shy of estimates ($117.41 billion reported compared to $117.82 expected) which again in real terms was a beat when you consider the continued strength of the US dollar. There were definitely a lot of positive aspects from the company's Q3 2015 earnings, which I believe will eventually be reflected in the share price going forward. The company's same store sales in the US increased by 1.5% with traffic being up 1.7% but the most powerful metric for me was the company's growth in groceries, which hasn't seen growth for several quarters. Investors need to remember that this division accounts for 56% of the company's top-line so meaningful growth here would be a huge help in turning around Walmart stock. Wal-Mart needs certain divisions to step up and be counted as it invests heavily into its business over the next few years so investors would have been pleased to see growth in this area..
If the grocery uplift is a sign of things to come in the company's US market, then this stock could easily rally over 20% from present levels over the next 3 to 5 years. Why? Well this company had a market cap of almost $250 billion just a few short months ago and management is guiding an extra $45 to $60 in revenue to the company in the next three years. The company's investment route in the US is to really mark up its existing stores in terms of stocking, cleanliness and most importantly customer service. It seems to be working with 70% of the retailer's stores now seemingly up to the required standard and I think the improvement in the customer experience will again be demonstrated when the company announces earnings next quarter (which will be after Black Friday, Thanksgiving & Christmas).
Bears will point to the fact that new store openings in the US have never been lower but traffic and same store sales are still up which is what the company needs during this heavy investment cycle. Earnings currently are obviously down on past quarters but this is to be expected with elevated investment into e-commerce, wages and training and obviously the up-scaling of the super-centers. There will be plenty of time to open new stores on mass but now the core objective is to increase the dollar amount of its sales per square foot. Costco (NASDAQ:COST) for example generated more than $1,000 in sales per square foot of its warehouses. Wal-Mart may not be the same business model but it knows it can get this ratio up pretty substantially by investing in existing stores. Its present rate for example is still a poor $400+.
Another perceived disappointment was the company's e-commerce division which grew only 10% in the quarter compared to 16% in Q2 and 30% in the 12 months ago period. Is it a cause for concern? I don't think so, especially when you consider an expected $1.5 billion will be pumped into this division this year. If the grocery growth trend continues, all I can see is growth in this area due to the substantial real-estate the company has on its books ( 4,500 US stores and five fulfillment centers to handle online orders). The physical stores give Wal-Mart an advantage over strict online retailers as the stores can act as pick up points for order collection. Wal-Mart will get better in this area but it will take time. The important thing to note is that e-commerce is still a growing trend and I can only see WalMart taking market share from Amazon (NASDAQ:AMZN) over time which incidentally is still way ahead of the chasing pack.
The e-commerce market's 10% growth rate announced for Q3 fiscal 2016 was mostly US based but I see opportunity further afield in this area. In China for example, the e-commerce market is both a bigger market and is growing much faster than in the US despite the market being dominated by Alibaba (NYSE:BABA) (Similar to Amazon in the US). However, WalMart has made its intentions clear in this region by taking full ownership of the e-commerce company "Yihaodian" (an original joint venture initiative). It will be interesting to see how the acquisition of Yihaodian can be scaled in China as it already has millions of buyers who over time should buy more due to the lack of traditional brick and mortar retailers in the country. These initiatives are of big interest to long term Wal-Mart investors because of the potential growth rates involved
To sum up, Wal-Mart earnings Q3 fiscal 2016 surprised many in that the company beat earnings estimates by a fair margin. I acknowledge that sales and earnings are down on preceding quarters but this is mainly due to heavy investment and dollar strength which is affecting international earnings. However, its biggest market showed robustness with same store-sales and traffic increasing which illustrates that its superstore "clean-up" operation seems to be gaining traction. The stock is too cheap to ignore it (P/E ratio is less than 13) and the elevated investment is sure to eventually drive the top and bottom lines which is why I think WalMart stock is an excellent play for a 3 to 5 year hold.