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Retail giant Wal-Mart Stores (NYSE: WMT) has endured a tough year. It is under pressure from a number of forces, all of which are combining and are negatively affecting its sales.
These forces include the strengthening U.S. dollar, which has weighed on its overseas business; rising wages in the U.S.; and the emergence of online retail, which is hurting traditional brick-and-mortar business.
In response, Wal-Mart is making significant investments in its stores and its employees. The company is closing hundreds of underperforming stores, and is prepared to spend billions to improve pay for and better train its employees. While these investments are the best course of action to ensure the long-term health of the business, investors are waking up to the crude reality that Wal-Mart’s turnaround may be a multi-year process. However, not all hope is lost ̶ Wal-Mart may still be a rewarding stock for investors willing to exercise patience.
The Bad News
Once again, Wal-Mart earnings report disappointed. The company earned $1.43 per share last quarter, down 6% from $1.53 per share in the same period last year. That missed analyst expectations of $1.40 to $1.55 per share.
Even worse, Wal-Mart once again cut its future sales forecast. The company now expects flat sales for the fiscal year, down from previous expectations of 3% to 4% sales growth in constant currency.
Wal-Mart is spending more to try to get shoppers back in the doors ̶ including paying its employees more, spending more on employee training, and renovating stores ̶ but it acknowledges that this will take time to result in stronger traffic.
Much of the disappointing forecast has to do with currency. The strengthening U.S. dollar erodes revenue earned overseas. Wal-Mart expects currency fluctuations to shave off a whopping $12 billion from its total sales this fiscal year.
The company now expects earnings of $4 to $4.30 per share for the full year, which would be significantly lower than the $4.57 per share earned last year.
The Good News
While this may cause investors to lose hope, there are reasons to stick with Wal-Mart over the long term. First, the stock is cheap. After a bruising 2015 ̶ the stock is down 20% in the past one year ̶ the valuation is down to low levels. Wal-Mart stock trades for 14 times earnings, down from a high of 18.5 times in early 2015.
Investors are very pessimistic regarding Wal-Mart earnings growth ahead. This negativity is certainly justified given its headwinds. But this could be an advantage for the company, as expectations are now very low. If Wal-Mart can simply return to earnings growth, investors may bid up the stock to more normal valuation levels.
Wal-Mart may be able to prove its doubters wrong, because it does have some compelling catalysts for future growth, like its Neighborhood Markets banner. These are smaller-format stores which are situated perfectly for large cities and urban areas, locations which Wal-Mart has been unable to penetrate thus far.
But the Neighborhood Markets segment is performing at a high level. Last quarter, comparable sales increased 7% at these stores.
Another catalyst is Wal-Mart’s online business. The company has invested heavily in its online capabilities to better compete with Internet rivals like Amazon.com (NASDAQ: AMZN). This is starting to work—Wal-Mart’s e-commerce sales rose 8% last quarter in constant currency.
In addition, Wal-Mart remains a strong dividend stock. After Wal-Mart earnings were reported, the company raised its dividend from $1.96 per share to $2 per share. The stock yields 3%, which is a solid yield given the low-rate environment. And, Wal-Mart has come through with 43 consecutive annual dividend increases.
The bottom line is that Wal-Mart has a long track record of steady profits and reliable dividend increases. It is the biggest retailer in the world, and although it has hit a bump in the road, it has successfully navigated tough times before.
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