Walmart Stock Still A Good Investment Despite The Disappointing Quarter

  • Walmart reported disappointing Q4 and fiscal 2016 results, with soft guidance for 2017.
  • F/X headwinds and international sales slowdown weighed on the company’s disappointing top-line.
  • The company is committed to turning around its failing international operations and growing its digital offering.

Retail giant Walmart (NYSE:WMT) reported its fourth quarter and fiscal 2016 financials with mixed results, showing slower e-commerce growth than expected and a disappointing 2017 revenue increase that triggered a 4% drop in its stock price. Walmart came to this earnings release after launching a broad fundamental change to its format strategy and announcing the expected closure of 102 Walmart Express stores, a downsizing of Puerto Rico operations, and a restructuring of the Brazilian business.

The recent announcement of Walmart's strategy change to abandon the small stores format and reevaluate store profitability fueled a rally in Walmart's stock price that was also supported by the worldwide sell-off that pushed investors to defensive stocks like Walmart.

In an earlier article that was published before that earnings release, I highlighted a number of focus areas that investors should pay attention to: F/X impact, e-commerce growth, and international segment performance. All three focus areas were key topics on Walmart's report to the market.

Overall, Walmart delivered disappointing results, starting from a top-line figure of $129B that was $1B below analysts’ estimates and $2B below Q4’15 revenues. The disappointing YoY decrease of 1.4% was driven mainly by a 10% net sales drop in the international segment and a 4% impact of F/X headwinds. The F/X impact is a result of the latest currency fluctuations worldwide and is not a problem unique to Walmart. However, the 10% net sales drop is a serious failure for Walmart.

Brazil, the U.K, and China have weighed on Walmart’s international performance. In Brazil, political and economic instability and high inflation are impacting retail and consumer activity, which is driving operating income lower YoY. Downsizing of the Brazil operation is expected to address some of the challenges Walmart faces there. Other problems will be dealt by revising and repositioning the customer proposition for the hypermarket format.

David Cheesewright, Walmart's International CEO, mentioned that Walmart is committed to turning around its business in Brazil. In the U.K., Walmart faces extensive and intense competition that has fueled a YoY decline in net sales. However, the company remains committed to expanding its local operations in the U.K., taking aggressive actions, and turning that business around.  In China, Walmart experienced a decline in sales, as did most other retailers and consumer products resellers, due to the economic slowdown there. Walmart plans to continue expanding in China.

In the e-commerce business, Walmart grew by only 8% YoY, which was significantly lower than Amazon’s 26% and lower than the recent trend. The slowdown in e-commerce growth is driven by the slowdown in Brazil, the U.K., and China, as mentioned above. In 2017, Walmart will focus its e-commerce attention on increasing online grocery sales along with expanding its digital offerings to customers. Walmart was also starting to operate a full back-end and front-end online and shipping business in the U.S. and leveraging the Yihaodian acquisition in China.

Looking at the 2017 guidance, Walmart expects a relatively flat growth pace in 2017 and presents soft guidance for the first quarter of fiscal 2017. The disappointing Q416 results that missed analysts’ consensus, along with an  e-commerce slowdown, weak guidance, and significant investments to turn around international businesses in Brazil, the U.K. and China, made Walmart's story unattractive in the short term.

However, the massive investments Walmart is putting into turning around its business, as well as expanding its online and digital offerings, could suggest a significant upside over the long term. In times of economic instability, I would still choose Walmart as a defensive investment due to its commitment to digital, international, and local growth.

Lior Ronen Lior Ronen   on Amigobulls :
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