- Walmart announced that they expect earnings per share for the next fiscal year to reduce by 12%.
- The market responded with a 10% reduction in Walmart stock price.
- Walmart is investing in ecommerce, customer experience, and wage increases.
- Stock is unlikely to drop far below its current point and should be a good time to buy.
In a surprising turn of events, Walmart (NYSE:WMT), the world's largest retailer, announced at its 22nd Annual meeting for investors that it expects earnings per share to reduce by 12 percent during the next fiscal year. The market responded with a bearish blow, sending the Walmart stock price to a 10% crash in a single trading session, making Wednesday the 14th of October the worst day for Walmart stock since 1998.
However, this came as little surprise for some investors. The writing has been on the wall for a while now. One of the biggest mistakes Walmart made was to allow Amazon (NASDAQ:AMZN) to grow to its current size without going toe-to-toe with them. Therefore, Walmart has now decided to spend more money on e-commerce, and has plans in place to build warehouses dedicated to this venture. This should come as a sigh of relief to Walmart investors. It is worth noting that Amazon has all but perfected the art and science of advertising, distributing, and customer service required to have 244 million active users.
Walmart is also getting burnt by discount stores, and the strength of the dollar. Additionally, they took the decision to increase wages paid out to store staff, in a move aimed at improving customer service. Arguably, people don't go to Walmart for great customer service. At the end of the day, this retailer has a reputation for providing unbeatable prices and this needs to be protected. Plus, the increase in wages can only work if an improved customer service experience is able to generate enough revenue to cover the cost of increased wages and then some.
To give you an idea of Walmart's scale, their announcement didn't only affect them. They plan on investing billions of dollars on lowering prices over the next three years. As a result, the alarm bells of a price war rung across the retail sector, causing stock of Home Depot and other retailers to suffer.
To be honest, Walmart is a company doing whatever it can to buy itself out of a fall. There was a time when parents would buy their children shares in Walmart as a gift because it was believed that it was the safest option. This is a simple case of the market leader thinking they can't be shaken, and then scrambling to catch up. We saw it with Myspace, Blackberry (when the iPhone was released), Yahoo, and now we are seeing it with Walmart.
Saying all this, Walmart is still very well placed to fight its way out of this situation. I am going to put my head on the chopping block and state that the reduction in earnings per share isn't going to be as big as Walmart is stating. Here is why: it is better for Walmart to state a high expected reduction now than for it to hit investors by surprise. A strong performance over the Christmas and New Year period should restore investor confidence.
It is worth remembering that Walmart is predicting lower EPS due to an investment in the future of the economy. The only issue is the decision to take so many actions at the same time instead of taking it step-by-step.
In conclusion, Walmart stock value is unlikely to go significantly lower. With a limited downside risk, this is a good time to buy the beaten down stock. Their ecommerce expansion is likely to be very successful due to their large economies of scale. It is going to be an interesting next 12 months.