- WalMart stock lost 10% of its value in a single trading session after announcing it will not be profitable for the next two years.
- Other retailers, which should benefit if it’s falling, fell for no good reason.
- WalMart is a bargain right now, but so are its rivals.
But fascination over WalMart’s 10% fall on Oct 14, which extended into yesterday's trading when it traded below $60, did not have to extend into the rest of the retail sector. People are still buying things. The U.S. consumer is, by all reports, fairly flush at the moment.
So please explain why Target (NYSE:TGT) dropped 3.5% during the day (Oct 14), why Dollar Tree (NASDAQ:DLTR) dropped 3.3%, why Kroger (NYSE:KR) lost 2.9%, and why even Costco (NASDAQ:COST) lost 1.6% of its value, or almost $1 billion. If WalMart is indeed circling the drain, these are the kind of companies that should benefit.
The fact is, WalMart is not circling the drain. While it no longer expects to turn a profit before 2018, as it starts paying employees a decent wage and seeks to integrate its stores into its e-commerce efforts, it’s also expecting to grow. CEO Doug McMillon’s projections are for sales to keep growing $15 billion/year during this period, which would put 2017 at $530 billion. That’s faster, in absolute terms, than Costco sales are growing. It’s faster, in absolute terms, than Kroger sales are growing. In strictly dollar terms, its sales are growing about as fast as Amazon (NASDAQ:AMZN) is growing.
The WalMart panic, in short, is grossly overdone. At $60/share Walmart is valued at $192 billion. That’s about 40% of last year’s sales of $485 billion. This, for a company whose operating cash flow in its last “disastrous” fiscal year came to $30 billion.
By contrast, Target shareholders are paying 67 cents for each dollar of sales. Costco shareholders are paying roughly 60 cents for each dollar of sales. DollarTree shareholders are paying $1.75 in equity for each dollar of shares.
WalMart, by conventional measures, is a screaming bargain.
Now WalMart does have some problems. Its big-box nature is at odds with the current decade’s move toward smaller homes and close-in living. (The same is true for Costco, and Target.) Sometimes the stock in its stores looks more like a jumble. (The same is true for DollarTree.) Help can be hard to find. (True at Costco, although the people there smile more because their pay is higher.)
But McMillon was already starting to address some of those problems. His Neighborhood Market concept, a smaller outlet focused on fresh produce, is comparable to a Kroger store, with lower prices. The higher wages, which were announced early this year, should improve employee morale and make the stores feel more like a Target.
And no one is thinking about what might happen if McMillon’s new strategy of integrating stores with e-commerce gains traction. If you can get delivery, today, of your WalMart shopping list, or pick it up in minutes on your way home from work rather than wandering the aisles, are you really going to pay twice that much to have Amazon.Com deliver the same goods to you?
Right now, WalMart stock is a screaming bargain. But thanks to its collapse yesterday, its retail peers are now also available at something closer to WalMart prices.