Why Wal-Mart Stock Is No Bargain

For Wal-Mart (NYSE: WMT), October is shaping up to be a particularly cruel month. First the retail behemoth took the uncharacteristic move of laying off 450 workers from its Bentonville, Ark.  headquarters in an attempt to become a more nimble operation. Then last week, in a happy-sounding announcement that was framed to sound as if it were delivering good news, the company dropped this bombshell: Earnings next year are expected to fall 6% to 12%.
This is the sort of thing that wasn’t supposed to happen to Wal-Mart, the retailer that has masterfully catered to consumers’ every need from low-priced children’s apparel to low-priced organic groceries, while paying a dividend that helped win the attention of Warren Buffett.

Wal-Mart Stock Nosedives

But the company’s announcement on Oct. 14 that next year’s earnings would disappoint was an unfocused document that cited currency exchange fluctuations for flat sales this year and costs related to investment in training that would contribute to a steep decline in income next year. Wal-Mart’s statement danced around a discussion of its core operations: why it’s suffering, and how exactly the company planned to respond.
Wal-Mart shares took a nosedive on the news, and they’ve been trading lower ever since. Wal-Mart stock is currently trading more than 12% lower than its price before the earnings warning was issued. It’s worth noting not only that the stock cratered but that it failed to rebound. I’d expect it to stay at these lower levels, and maybe even drop further depending on how well the company can articulate its future plans.

Online Business a Factor

I say this for two reasons. First, as I’ve noted in some other recent columns, the current market is a punishing one, where even small earnings disappointments are leading to strong stock reactions. It’s as if the market is doing a big reboot and using any new information to reset stock prices. Wal-Mart’s announcement that earnings would fall came without warning and raise serious questions about its ability to continue to dominate the retail sector.
Second, even though Wal-Mart’s announcement came as a surprise, it actually resonates all too well with anyone who has been watching trends in retail. Yes, Wal-Mart has a large and competitive online retail site but because of its massive physical retail presence – more than 11,000 stores – it’s never going to be a true online retailer like Amazon.com (NASDAQ: AMZN).
While Wal-Mart was cagey in its earnings warning with little detail about the specific nature of the problem, it seems the company’s old economy model is catching up to it. And without a clearer picture of its turnaround plan, this stock is not looking like a bargain.

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