Wal-Mart Still Has Growth Runways Despite Its Mind-Blowing Size

  • Wal-Mart stock has done exceptionally well by handily outpacing the sector and the market year-to-date.
  • This has come because Wal-Mart is beginning to show signs of returning to growth.
  • Wal-Mart can still grow despite its enormous revenue base.

For a number of years now, retail giant Walmart (NYSE:WMT) has been stuck in no-growth territory. Over the last five years, Wal-Mart's top line has expanded a mere 4.37% while net income has increased just 6.88%. In comparison, the S&P 500 has seen revenue grow 83.58% while net income has increased 96.28% over the period. Consequently, WMT stock has badly lagged the  retail sector and the S&P 500, with a gain of 37.5% vs. 56.7% of the retail sector and 58.3% of the S&P 500.

Wal-Mart vs. SPDR S&P Retail ETF 5-Year Returns


Source: CNN Money

But this year the tables have turned with WMT outshining both the retail sector and market with year-to-date gains of 19.3% vs. -3.5% for the retail sector and 2.31% for the S&P 500.

Wal-Mart vs. SPDR S&P Retail ETF YTD Returns


Source: CNN Money

So why has investor sentiment about Wal-Mart changed so suddenly? It's quite easy, really. Over the past couple of years, the consensus has been that Wal-Mart was just too big to grow. That line of reasoning certainly seems tenable because the law of large size tends to kick in with a vengeance when companies grow much faster than their sector, as Wal-Mart did during the 90s and during the early part of the 2000 decade. With a revenue haul of $482B last year, Wal-Mart has a bigger revenue base than Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), and Amazon (NASDAQ:AMZN) combined.

But Wal-Mart is now slowly but surely beginning to show signs of coming back to life. During the last quarter, the company posted revenue of $115.9B, good for a modest but positive 0.9% Y/Y growth. Meanwhile, comparable store growth clocked in at 1%, marking the seventh straight quarter of positive same-store growth.

Meanwhile, Wal-Mart's decision to downsize its giant store count in the U.S. and reward its store workers with a pay hike has paid off by improving worker efficiency and inventory management. But more importantly, more people are now flocking to Wal-Mart stores. The number of weekly shoppers visiting Wal-Mart stores recently hit 260M after growing 1.4% Y/Y.

Closing the gap with Amazon

Wal-Mart says that it aims to add $60B in sales over the next five years mainly by focusing on international expansion and ecommerce growth. Whereas Amazon remains the undisputed leader in online retail, Wal-Mart has been making significant progress in this arena. Although Amazon's 180M online shoppers are more than double Wal-Mart's 84M, Wal-Mart online traffic has been growing at 14% Y/Y, almost double Amazon's 7.8% growth clip.

Further, Wal-Mart has been enjoying robust success in the third-party  marketplace. The company had only six third-party merchants back in 2014 but now boasts 300. Wal-Mart's third-party marketplace grew 65% during the final quarter of 2015 according to ChannelAdvisor. One big incentive for third-party merchants to sell their merchandise on Walmart.com is the ability to take part in promotions such as Value of the Day.

Meanwhile, Wal-Mart has copied many of Amazon's online selling strategies as I explained in this article. Wal-Mart has even adopted Amazon's pricing strategies and dumped its everyday low prices model last year in favor of Amazon's fluctuating prices. Wal-Mart is stepping up the battle with Amazon and  introduced a free 30-day trial for Shipping Pass, the same-day delivery service that offers Amazon-like perks just a few days ago.

The outlook for WMT stock

They say large ships take ages to turn and this certainly rings true in the case of Wal-Mart. Although the company is making good progress in online commerce, online sales still make up just 3% of its overall sales. It will, therefore, take years before they can have a significant impact on the company's top and bottom lines.

Wal-Mart's ambitious international expansion and downsizing its local store count can, however, have a more immediate and tangible impact on both the top and bottom lines, and help the company realize its goal to grow sales by $60B over the next five years. As long as the company keeps marching towards that goal, WMT stock can make sizable gains over the next couple of years.

Brian Wu Brian Wu   on Amigobulls :
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  • I do not have any business relationship with the companies mentioned in this post.
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