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Shares of Wal-Mart (NYSE: WMT) rose 5% on Tuesday after the discount retail giant posted better-than-expected quarterly earnings. Investors badly needed a strong Wal-Mart earnings report, since the stock has lost approximately 29% since the beginning of 2015.
The stock has been punished so badly that anything other than outright terrible results would have been good enough to beat expectations. Fortunately, Wal-Mart managed a beat, and investors are breathing a sigh of relief.
The Comforts of Home
Once again, Wal-Mart’s international business was hit by the strong U.S. dollar. The rising dollar over the past year is a big headwind for giant multinational businesses like Wal-Mart, because it reduces the value of revenue generated overseas. Last quarter, Wal-Mart’s international revenue fell 11%.
That being said, its U.S. business was a source of strength last quarter. Comparable sales, which analyzes sales at locations open at least one year, rose in the U.S. for the fifth straight quarter, up 1.5% year-over-year.
Overall, Wal-Mart’s total sales fell 1% to $117.4 billion. Diluted earnings per share from continuing operations clocked in at $1.03, which beat analyst expectations for $0.97 per share. Wal-Mart’s results are not very impressive, but because the bar had been set so low, it could still manage a beat.
Small Stores, Online Sales Lead the Way Again
One reason for Wal-Mart’s relative strength in the U.S. is its small-store format, which continues to excel. Wal-Mart operates the Neighborhood Markets banner, which are a group of smaller stores that cater to urban areas.
The Neighborhood Markets continue to be an important growth catalyst for Wal-Mart. Sales at the company’s flagship super-centers are slowing down, as consumers do more shopping online and at smaller stores. This necessitated a new strategy and Wal-Mart is finally responding.
Previously, Wal-Mart had no access to big cities like Chicago, which simply could not offer the company the necessary square footage to build one of its super-centers. In response, the company is building smaller stores, and the results are very good. Last quarter, comparable sales for Neighborhood Markets rose 8%.
Wal-Mart has also been besieged by online competition from the likes of Amazon.com (NASDAQ: AMZN). This is why Wal-Mart management has made boosting the company’s e-commerce capabilities a key strategic imperative. Last quarter, global e-commerce sales rose 10%.
Going forward, these two catalysts could allow Wal-Mart to continue beating earnings expectations. For the full year, the company narrowed its earnings forecast to a range of $4.50-$4.65 per share. Analysts expect $4.50 per share on average.
Wal-Mart Could Be a Compelling Turnaround Stock
Wal-Mart is under pressure from a number of fronts. Sales are eroding due to intensifying competition and earnings are in decline due to higher spending on employee wages and training. The company previously warned investors that earnings are not expected to grow again until fiscal 2019. Clearly, its turnaround will take time, and investors need to be patient.
But to its credit, Wal-Mart finally gave investors some good news after reporting third-quarter results. It seems that the company is, at long last, gaining traction in its strategic growth initiatives. The stock has had a very poor year, but if its turnaround is for real, this could be an excellent buying opportunity.
Wal-Mart stock trades for just 12 times earnings and offers a 3.4% dividend yield. The valuation is near a five-year low, and the dividend yield is near a five-year high. Plus, Wal-Mart is a member of the Dividend Aristocrat list, having increased its dividend for 42 years in a row.
As a result, the stock presents an attractive value and income opportunity, if the company can continue to beat expectations.
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