Wal-Mart Stores, Inc. Is Facing Economic Headwinds

By Market IQ  JUL 03, 2013 12:00 PM

While there are short-term headwinds, Wal-Mart's growth prospects and sound fundamentals present a foundational holding for the portfolios of dividend-growth investors.

 


Wal-Mart Stores, Inc. (NYSE:WMT) reported weaker-than-expected fiscal Q1 2014 results due to a 1.4% decline in US comparable store sales. The company earned $1.14 per share, missing Street expectations of $1.15 per share. Additionally, revenue of $114.19 billion fell shy of analyst estimates of $116.29 billion.

The decline in US same store sales can be mainly attributed to weak consumer spending during the quarter, primarily caused by payroll tax increase: As of January 1, 2013, payroll taxes in the US increased by 2%, which hurt lower- and middle-income segment consumers. Since the majority of Wal-Mart’s customers are within this demographic, Wal-Mart’s revenue and earnings suffered due to the tax hike.

Other reasons that contributed toward a disappointing quarter are as follows:

1. 2012 tax refunds were delayed due to year-end complications related to the fiscal cliff. Since the IRS delayed the filing process by 15 days, refund checks came later than usual. 

2. Prolonged cold weather impacted sales of weather-sensitive products.

3. Revenues suffered due to lower-than-expected price inflation of grocery items, which account for more than 50% of Wal-Mart’s revenues.

However, despite a disappointing quarter, there were some underlying positives for the retail behemoth. Key positive highlights include:

1. Wal-Mart exhibited encouraging market share metrics across several categories including food, consumables, and health and wellness OTC products.

2. Driven by strong e-commerce growth, Wal-Mart continued gaining market share in major international markets and generated positive comparable store sales growth, which resulted in overall revenue from international locations to increase by 5.4% during the quarter.

3. The company maintained stringent cost control over its operating expenses despite an increase in operating revenues and corporate expenses.

The retail giant has been in the midst of controversy lately. The company is currently embroiled in lawsuits with the US Justice Department over a bribery scandal in Mexico. As a result, the company spent $73 million on expenses associated with those reviews.

Most recently, labor and consumer groups have been pressuring Wal-Mart to take steps to ensure factory safety in Bangladesh, where it produces many of its goods and where a building collapse in April killed more than 1,000 workers. While Wal-Mart announced it would not join a broad factory safety plan supported by H&M and other large retailers, it said it would pursue its own plan, including conducting inspections of the 279 Bangladeshi factories it uses.

While these issues are unlikely to impact company financials in the long run, it may be a bit of an overhang for the stock price in the short run.
Based on Market IQ’s proprietary fundamental metrics, Wal-Mart is expected to outperform its peer group. Market IQ characterizes Wal-Mart as a high value, but average quality stock (see below).
 


Based on Market IQ’s valuation metrics, Wal-Mart is cheaper than 88% of its peers and offers compelling fundamental metrics that justify investment in the retailer (see below).



The company’s qualitative strengths can be seen in multiple areas such as Return on Equity (ROE) and EPS growth.
Additionally, Market IQ’s relative risk metrics suggest that Wal-Mart is likely to provide a smoother ride in terms of price volatility, especially during current turbulent times when there is a lot of anxiety among investors after the FOMC indicated that the Federal Reserve might begin tapering its asset purchases later this year. High market capitalization, historically stable earnings variability, cheap valuation metrics, and insensitivity to business cycles and credit spreads make Wal-Mart significantly less risky relative to other companies (see below).



Wal-Mart is attempting to play catch-up with Amazon.com, Inc. (NASDAQ:AMZN) in e-commerce, which will likely help the company achieve sales growth. Wal-Mart is looking to integrate its stores and e-commerce channel to provide a seamless shopping experience. It will also soon start offering gift cards and mobile coupons along with its “Scan & Go” service. Although online sales account for a small portion of Wal-Mart’s revenues, its vast customer base will likely help the company tap the growth opportunity in online retail.

Going forward, management is optimistic about company operations and profitability as impact from weather and tax-related issues that affected Q1 results are likely to fade. In addition, the company expects to improve its comparable sales growth in US.

While there are short-term headwinds facing the company, Wal-Mart’s growth prospects, sound fundamentals, and growing dividend stream present a foundational holding for the portfolios of dividend growth investors.

This article was written by Adil Yousuf and originally appeared on Market IQ

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