Wal-Mart Stock In Focus: Struggles & Prospects

Published June 24th, 2016 by Ben Reynolds

Wal-Mart (WMT) was founded in 1962 by Sam Walton.  The company has realized virtually unparalleled success since that time.

Today Wal-Mart is the largest business in the world based on its annual revenues of $483 billion.

Owning Wal-Mart stock has been very lucrative for long-term shareholders.

Every $1 invested in Wal-Mart stock in August of 1972 is worth $1,763 today (including dividends).  That comes to an annualized return of 18.6% a year.
Note:  Historical data for WMT in Yahoo! Finance starts on 8/25/1972

Wal-Mart is a compounding machine with a shareholder friendly management.  The company has increased its dividend payments for 43 consecutive years.  This makes Wal-Mart 1 of 50 Dividend Aristocrats – S&P500 stocks with 25+ years of consecutive dividend increases.

Despite long-term success, the company has struggled in recent years.  This article analyzes Wal-Mart stock in detail, including:

  • Recent struggles
  • Growth prospects
  • Recession performance
  • Competitive Advantage
  • How to find Wal-Mart’s fair value
  • 8 Rules of Dividend Investing rank

Recent Struggles

Wal-Mart generated earnings-per-share of $5.11 in its fiscal 2014.  That is the company’s all time earnings-per-share high mark.
Note:  Wal-Mart’s fiscal year ends in January.  This means ‘fiscal 2014’ for Wal-Mart is more like most company’s fiscal 2013.

Earnings-per-share for the company from fiscal 2014 onward shown below:

  • Fiscal 2014 earnings-per-share of $5.11
  • Fiscal 2015 earnings-per-share of $5.07
  • Fiscal 2016 earnings-per-share of $4.57
  • Expected fiscal 2017 earnings-per-share of $4.27
  • Expected fiscal 2018 earnings-per-share of $4.42

Source for expected earnings:  Yahoo! Finance

Clearly, Wal-Mart has not delivered growth over the last several years.  The company is not expected to eclipse former earnings-per-share highs until fiscal 2020.

What went wrong with Wal-Mart?

The company’s growth slowed dramatically in fiscal 2014.  By Fiscal 2015, earnings-per-share were declining.

The problem is declines in both net margins and in sales.

Margins averaged around 3.5% for Wal-Mart from fiscal 2007 through fiscal 2015.  Net profit margin declined to 3.0% in fiscal 2016, and is expected to be around 2.6% over the next 2 fiscal years.

The deep decline in margin is due to 2 factors:

  1. Significant increase in wages for non-executive employees
  2. Shift toward lower margin digital sales

These two factors are responsible for Wal-Mart’s decline in net profit margins.  Both are strategic directions taken by the company’s management.  The reasons why these initiatives were taken are discussed in the growth prospects section of this article.

Margin declines are the primary driver of Wal-Mart’s lower earnings-per-share.  Revenue peaked for Wal-Mart at around $485 billion in fiscal 2015.  We are in fiscal 2017 now, and annual revenues are around $482 billion.

Revenues have stagnated.  Part of this is due to market saturation.  Wal-Mart cannot expand much in the United States due to its past success…  It simply has too many stores already.

Contrary to what many people think, online purchases are not the cause of Wal-Mart’s revenue stagnation:

Online Sales Growth

Wal-Mart was still realizing solid growth in 2010 through 2013.  Online sales make up just 1 percentage point more of total retail sales in 2016 than in 2013.

I believe Wal-Mart has struggled with revenue growth due to an unmotivated work force, stores that are not as clean as rival Target (TGT) and other retailers, and well noted stocking problems.

With Wal-Mart’s recent struggles, why should investors consider Wal-Mart?

The company still has solid total return potential – especially after the company’s recent investments.

Growth Prospects at Wal-Mart

Wal-Mart has shifted its focus over the next several years away from maximizing earnings-per-share and towards maximizing revenue growth.

To this end, Wal-Mart is investing $2.7 billion over the next 2 years into its employees in the form of higher wages and better training.  The company has boosted all employee wages in the United States to $10 or more an hour.

Wal-Mart Investment In Employees

Source:  Wal-Mart 2016 Annual Report

Wal-Mart’s goal is to create a motivated work force that better serves its customers.  The large investment in employees is the single largest reason why earnings-per-share have declined for Wal-Mart stockholders.

In addition to investing in employees, the company is also investing heavily in digital growth.

To this end, the company has acquired a slew of smaller tech companies.  Wal-Mart Labs is the company’s tech hub based in San Bruno, California.

The company is currently the 3rd largest global online retailer, behind only Amazon (AMZN) and Apple (AAPL).

Wal-Mart expects rapid growth in its e-commerce operations over the next several years.  Investments in digital/e-commerce sales are a long-term commitment.  Digital operations are expected to post operating losses through fiscal 2019 as they scale.

WMT Digital

Source:  Wal-Mart 22nd Annual Meeting – Neil Ashe Presentation

Wal-Mart is taking on unprofitable operations today to grow the business into the future.  The company’s goal is to provide a seamless shopping experience, both on-line and in store.

In addition to its employee raises and digital investments, Wal-Mart is also rolling out more of its neighborhood market concept stores.

The neighborhood market store is Wal-Mart’s version of a tradtional grocery store. The stores are much smaller than Wal-Mart’s flagship Super Centers.

The company’s neighborhood market stores provide packaged grocery products, fresh (presumably) produce and meat, and pharmacy services.

Wal-Mart’s management has ‘reset’ the comapny.  Wal-Mart is positioned for faster growth over the next several years than the previous 3 or 4.

The company is projecting revenue growth of between $45 and $60 billionover the next three years.  This comes to revenue growth of between 3% and 4% a year.

In addition, Wal-Mart plans to repurchase $20 billion in shares over the next 2 years.  This is ~9% of the company’s market cap at current price.  Share repurchases should normalize at around 2% to 3% of shares outstanding a year over the long run.

Wal-Mart also has a 2.8% dividend yield.  The company’s revenue growth, share repurchases, and dividend combine to give investors expected total returns of about 8% to 10% a year over the long-run.  Returns could be a bit higher of margins improve over time (which is likely).

Total returns of 8% to 10% a year may not sound amazing, but they are around historical long-term S&P 500 averages – and higher than what the S&P 500 is expected to generate at current prices.

Return should never be considered outside of risk.  Wal-Mart is one of the lowest risk, recession proof investments around.

Stellar Recession Performance

Wal-Mart is well-known to provide every day low prices.  The company’s focus on price appeals to consumers of all income levels – but especially to those at the lower end of the United States’ economic spectrum.

Somewhere between 15% and 20% of all food stamp benefits in the Untied States are redeemed at Wal-Mart.

When money is tight, people tend to shop at Wal-Mart more than other stores.  This makes Wal-Mart an ideal recession stock.  Wal-Mart is one of the10 most recession proof Dividend Aristocrats.

The Great Recession showed the strength of Wal-Mart in recessions.  The company’s earnings-per-share through the Great recession are shown below

  • 2007 earnings-per-share of $3.16
  • 2008 earnings-per-share of $3.42
  • 2009 earnings-per-share of $3.66

Take a look at the earnings-per-share of the S&P 500 over the same time period for comparison: