- Wal-Mart is not going to simply lie down and let online retailers eat into its market share. Through convenient pick up options or local delivery, Wal-Mart can deliver goods much faster than Amazon on certain occasions.
- Wal-Mart's popularity of its savings catcher feature on its app illustrates how much it is catching up on the likes of Amazon & EBay.
- Use recent weakness in Wal-Mart to scale into a position. Its one of the most undervalued retailers out there but recent investments should ensure this stock rallies once earnings start growing once more.
What's Dragging The Wal-Mart Stock
Walmart (NYSE:WMT) definitely hasn't had one of the best of years this year, despite achieving revenue growth. The stock is down 22%+ year to date which really is huge considering we are dealing with a company with a market cap of $213 billion and annual revenues of $485 billion+. The reason for the fall has been declining earnings which have transpired mainly as a result of:
- An increase in wages to store-workers earlier this year
- Lower margins in its pharmacy business
- Investment in e-commerce capabilities
- Expansion of its footprint by opening up more of the smaller, customized neighbourhood market stores (Grocery and Pharmacy)
Strong Fundamentals Back Wal-Mart
The above initiatives are definitely weighing on margins but I can only see revenues increasing from these undertakings which should grow profits once more. When you consider where the stock is trading at present (very near its yearly lows) and the possibility that the US could enter a bear market in the short term, this stock, due to its sheer size and diversification definitely offers downside protection. Furthermore if the share price slips below your entry point, you are going to get paid handsomely while waiting, as the company pays out a 3% dividend yield. Let's go through this article, go into details of how the company is slowly turning itself around, but first, let's look at this stock's long term fundamentals, which to me are sound, despite the recent poor share price performance.
|Years Of Dividend Increases||40+ Years - Pass|
|Free Cash Flow||$3 billion (10-Year Trend Is Up) - Pass (Very Important For Dividend Investors - Dividend Currently Is 2.94%)|
|Revenues||$485.6 billion (10-Year Trend Is Up) - Pass|
|Profit Margins||3.2% - (10-Year Trend Is Flat)|
|Price History of the stock||Up 51% in the last 10 years excluding dividends - Pass|
|Healthy balance sheet||Total assets = $200.7 billion (10-Year Trend Is Up) - Pass|
|Resistant to recessions?||Sales actually grew in the recession of 2008- Pass|
We can see from its fundamentals that the main metric that it is struggling with, is its profit margin, which is quite low at just over 3%. However, look at the recession metric. Sales actually grew in 2008 and 2009 which should offer some peace of mind to investors if the US does indeed enters a bear market. Recessionary times definitely help perceived low cost retailers and with the company's recent foray into opening smaller neighbourhood stores ( to compete against dollar stores, etc.), Wal-Mart is reinforcing that it is not afraid to scale meaningfully.
How Wal-Mart Is Competing With The Likes Of Amazon
The main advantage this company has going for it is its sheer size. The more the company scales, the more it will be able to negotiate even deeper discounts from its suppliers. Therefore, confident of its pricing and knowing full well the personality type of its customers, Wal-Mart launched a feature in its mobile app called savings catcher. This feature enables the buyer to compare Wal-Mart's price to the company's main competitors. If indeed a lower price is found (all prices are shown on the receipt), Wal-Mart will reimburse the buyer in the form of credits. This is significant on Walmart's part as it builds trust by being transparent with its customers. Wal-Mart already knows its customers are shopping around for the best deal. Why not just give them competitors' prices up front?
How do we know savings catcher has been a hit?. Well, the feature alone, when it was launched last year in August, took the user count from 4 million to 14 million in less than 30 days and is now approaching 30 million users. The psychological benefit here is huge, in that even if customers find cheaper prices and get money or credit back in the process, they are visiting Wal-Mart's app for the info and not competitors websites or apps which is a huge benefit for Wal-Mart going forward.
This brings me to my second point which is the heavy investing Wal-Mart is doing with regards to its online presence. Personally I believe that many analysts have the trend wrong here in that they think online retailers like Amazon (NASDAQ:AMZN) will continue to take huge amounts of market share off offline retailers such as Wal-Mart, but it is not going to be this cut and dry. Apart from Wal-Mart investing heavily in its e-commerce capabilities, I still believe companies like Wal-Mart in some cases actually have an advantage over online companies in that they can offer their customers a pick-up option for ordered goods. This saves delivery charges for customers and it is definitely an advantage that brick and mortar retailers currently have because the customer can change the product on the spot if it is not suitable. Compare this with a strict online purchase that goes wrong and the customer could be waiting weeks until he receives exactly what he wants.
Finally, with the holiday season coming up, you are going got hear a lot about Wal-Mart's sales and subsequent price wars between the leading retailers. Holiday periods for me is just noise, as all retailers with sizable presence should do very well even in the event of a recession hitting the U.S. Amazon is up 71% plus in the year to date, because of its growth rates, with the stock now trading at $533 a share. I just see too many comparisons between Facebook (NASDAQ:FB) and Amazon in that both these stocks have huge growth rates already priced into their share prices. For example Amazon's market cap is over $40 billion higher than Wal-Mart even though Wal-Mart's revenues outperform Amazon's by a factor of more than 5. Furthermore because of Amazon's massive push to grow its business, net profits are still in the red but Wal-Mart is far more established producing annual net profits of almost $16 billion. Furthermore Wal-Mart's P/E ratio is far lower and as mentioned above, it pays a nice growing dividend which would help if we entered a bear market in the near future.