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Wal-Mart (NYSE: WMT) shareholders lost money and lived worse Thursday following an unexpectedly dour earnings report that saw fourth-quarter profit fall 7.9% year-over-year.
Even more disappointing was Wal-Mart’s sales forecast for its current fiscal year, which began in February. The brick-and-mortar behemoth now predicts flat sales growth, compared to its previous forecast – made just four months ago – of 3% to 4% growth.
CEO Doug McMillon cited that persistent bugaboo for American multinationals – the exasperatingly strong U.S. dollar – plus the company’s decision to close 269 stores worldwide and increase employee minimum wages as reasons for the revised outlook.
Of course, the e-commerce elephant in the room anytime Wal-Mart holds an earnings call is that enemy to all things brick and mortar: Amazon.com (NASDAQ: AMZN).
Wal-Mart reported 8% net online sales growth in its recent quarter, compared to 22% growth in the year-ago quarter. By comparison, Amazon – despite missing earnings forecasts and seeing its stock crushed last month – still registered a 22% increase in net sales in its fourth-quarter period.
Wal-Mart and Amazon investors’ respective reactions are evident in the chart below, which shows the year-to-date performances of the stocks as of Thursday’s market close. Prior to the earnings announcement, Wal-Mart shares had been up nearly 8% for the year.
Source: Yahoo Finance
Interestingly, sandwiched in between the respective earnings announcements was scuttlebutt that Amazon is considering going the brick-and-mortar route. The rumors were spread by Sandeep Mathrani, CEO of mall operator General Growth Properties (NYSE: GGP), who claimed during his company’s earnings call that Amazon plans to establish up to 400 physical bookstore locations.
Amazon has neither confirmed nor denied said rumors, and Mathrani and company issued a damage control statement that his comments weren’t representative of Amazon’s corporate plans, etc., etc.
If Amazon’s alleged aim is to finally deliver the kill shot to bookseller competition like Barnes & Noble (NYSE: BKS), that’s all well and good. But at the same time, unless Amazon is seeking to purchase Barnes & Noble at a discounted used book price, why bother?
Chapter 11 casualty Borders has long since drowned, while Barnes & Noble has tread water with the life preservers of Nook e-reader sales and its in-store café partnership with Starbucks (NASDAQ: SBUX).
Standing at the Crossroads
The common denominator between Amazon and Wal-Mart is their common desire to sell anything and everything to consumers at cheaper prices. Both companies used economies of scale in their respective niches to achieve worldwide dominance during their paths to glory.
Many billions of dollars later, it appears we’re at a crossroads for e-commerce and physical retailing.
Wal-Mart is under pressure from Amazon in the online space, but Amazon is under pressure from a slew of established retailers and e-commerce upstarts in cyberspace. While the global shift toward e-commerce is undeniable, Amazon’s purported desire to establish physical locations indicates that a hybrid approach might prevail – at least in the short term.
Indoor shopping malls are dying, but outdoor retail centers continue to thrive. As much as I personally cringe at the thought of stepping foot inside the neon-lit chaos of a Wal-Mart store, it’s the quintessential anchor of the retail district of a typical midsize American city.
And despite its earnings miss, Wal-Mart still raised its annual dividend by 2%.
So while Wal-Mart’s mea culpa on its sales guidance is concerning, for income investors it’s still among the most stackable of the U.S. blue chips.
Here are some of my favorite Wyatt Investment Research articles of the week:
Obama Calls a Bottom in Oil Prices – In the 1970s and 1990s, the Department of Justice inadvertently called a top on both IBM (NYSE: IBM) and Microsoft (NASDAQ: MSFT). President Obama just did the opposite with oil.
The New Abnormal: Negative Interest Rates – In her testimony before Congress last week, Federal Reserve Chairwoman Janet Yellen said that nothing – including negative interest rates – is off the table. But so far, negative interest rates in other parts of the world seem to be doing more harm than good.
Burger King Hot Dogs: Smart Move or Act of Desperation? – While Restaurant Brands International (NYSE: QSR), parent company of Burger King, deserves credit for thinking outside the burger bun, other fast-food chains have tried – and failed – to sell hot dogs.
Activist Hedge Fund Tries to Beat the Netflix Curse – The growth of Netflix (NASDAQ: NFLX) is putting pressure on a number of companies, but one activist hedge fund thinks this victim has taken enough of a beating.
Media Stocks: Will the Forces of Change Awaken? – Since the start of 2009, the media sector has returned 315% versus 163% for the S&P 500 index. But these once darlings of the stock market have fallen out of favor, as Wall Street has finally realized that changing viewing habits and disruptive technology have permanently altered the media stocks landscape.
IBM Shares Surge Above Resistance After Announcing Deal – IBM shares are rallying following the announcement that it is acquiring health care software provider Truven Health Analytics for $2.6 billion. IBM shares had been moving up with the overall market over the last few days – which kept the stock from entering oversold territory – but the rally has brought IBM close to overbought territory.
Time to Reconsider High-Yield Investing – High-yield investing has been out of favor for at least the past 18 months – largely due to the carnage in the energy sector. But as more quality high-yield investments prove they can maintain their distributions and dividends, investors’ risk perceptions should change.
How Smart Are Smart Beta Funds? – In simple terms, smart beta funds are passive index funds with an actively-managed twist. Whether they’re a smart alternative is another question entirely.
Have a great weekend!