Wal-Mart Stores, Inc. (WMT): Time To Get Out Of Wal-Mart Stock?

  • Can Walmart Finally Start Delivering Robust E-commerce Sales Growth In The US In Q3?
  • The Chinese market is definitely where Walmart can make inroads. Will guidance here change the market's long term opinion?
  • Declining operating margins will continue to result in a lagging share price. Can higher revenue forecasts help the situation here?

Walmart (NYSE:WMT) announces earnings on the 17th of November and investors will be hoping that no shocks emerge from the report. Analysts are looking for an EPS of $0.96, which would be a $0.07 drop Year-on-Year (YoY). Walmart has to be careful not to alienate its core shareholders over the next few years, as it moves deeper and deeper into e-commerce. Traditional shareholders have always been used to robust levels of store openings, which have invariably led to top and bottom line growth. We saw this in the second quarter this year when the company reported almost 3% organic sales growth. Footfalls rose by 1.2% in the US, which means that the giant retailer is now gunning for nine straight quarters of positive same-store sales growth for its third fiscal quarter this year.

However, the management dampened spirits a little bit, when it announced flat earnings growth next year, at its recent investor's meeting. The stock dropped over 3% as a result. Therefore what investors have to decide now is if the stock is worth holding through this heavy investment period. There is no doubt that the company's heavy investing (mainly in the e-commerce channel) is going to weigh on earnings growth going forward. Furthermore, for the most part, e-commerce is uncharted territory for the retail giant, and due to slowing growth, it has had to spend aggressively this year in order to fend off strong competition. Here is what investors will be watching when Walmart releases its third quarter results.

E-Commerce Sales In The US Needs To Deliver In Q3 & Q4

The reasoning behind Walmart's aggressive e-commerce strategy is because it feels the offline market is getting saturated (especially in the US). Investors though will need to see evidence that elevated investment in e-commerce is paying off. In fact with the recent Jet.com acquisition, Walmart expects 20 to 30% growth in its e-commerce segment in the second half of this year. Personally, I believe the company will need to report growth on those lines, especially after the announcement last month that the opening of new stores would slow down significantly in the US. Companies like Amazon.com (NSDQ:AMZN) continue to grow top line despite investing aggressively in its business. Sooner or later, Walmart will have to show the same growth trends to investors in order to keep them interested. (Also Read: Will Walmart Stores Inc Turn Around Its ECommerce Fortunes With Jet.com?)

Guidance Concerning Its New Partnership With JD.com

Store openings in China have also slowed but Walmart seems to be ultra focused on its e-commerce division in this market. It is ironic as many analysts and investors alike believed that Walmart was bailing out of China especially when it sold its Yihaodian platform to JD.com back in June of this year. However, instead of playing defense, Walmart has decided to ramp up its operations by increasing its stake in JD.com (from 5% to 11%). Walmart is now focusing on (through an investment in New Dada) delivering groceries to customers within a matter of hours. Walmart knows it has the products and will use the digital capabilities and logistics of on the ground companies to spread its empire. Will it work? One thing is for sure - this market holds the key for the next leg up in the share price. Therefore, if Walmart can show meaningful revenue growth and guidance here, the market will undoubtedly price the stock higher. Again we need to see results. Between the $1 billion+ amounts that have been ploughed into e-commerce over the past few years and now big investments into JD.com & Jet.com, investors need to see progress.

The Market Needs To See How Margins Will Improve Over Time

Long-term shareholders must also be worried about operating margins, which dropped to 4.7% last quarter, which is very poor from a historical perspective. In fact, operating margins have been heading south since 2012, and incidentally, the stock price is still trading below its 2012 highs. How long will spending stay elevated? That's a crucial question since Walmart is valued off operating income and net income. Furthermore, the retailer (even in the event of sustained spending) should be able to leverage its higher revenues through more cost reductions over time. However, 5.8% is the company's 10-year average operating margin, and presently, the company is nowhere near this. The reason for Walmart's pivot into e-commerce was because of a more profitable model but investors are slowly running out of patience. (Also Read: Should Berkshire Hathaway Inc. Dump Wal-Mart Stores, Inc. For The Kroger Co?)

Summary

Walmart's latest investor meeting basically conveyed to investors that the company would remain a "work in progress" for a number of years. Flat earnings growth has already been guided for next year, which may cap gains in the share price going forward. Nevertheless, astute investors will be looking to see if these current elevated investments will indeed pay dividends. E-commerce in the US has to produce a big top-line number, in the absence of which, I foresee the stock continuing to sell off from here. Also interested in technology stocks? Check out Amigobulls' tech stock picks, which have beaten the NASDAQ by over 104%.

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  • I do not hold any positions in the stocks mentioned in this post and don't intend to initiate a position in the next 72 hours
  • I am not an investment advisor, and my opinion should not be treated as investment advice.
  • I am not being compensated for this post (except possibly by Amigobulls).
  • I do not have any business relationship with the companies mentioned in this post.
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