Walmart (WMT) stock has missed out on the rip-roaring rally lately, with the big-box retailer barely above breakeven since early April while the S&P 500 has tacked on another 7%.
And unfortunately for Walmart investors, chances are WMT stock will continue to lag the market going forward.
To be fair, Walmart isn’t the only struggling retail stock. Fellow big-box retailer Target (TGT) is flat in the past two months and has underperformed slightly in 2013 thanks to trouble with consumer spending on the heels of payroll tax increases. Just yesterday, Target reported Q1 earnings of its own that missed expectations on soft sales.
But as the 900-pound gorilla of retail stocks, Walmart’s troubles are perhaps the most noteworthy because of what they say abut the sector and consumers in general. The problems at Walmart are multifold, but here’s a quick rundown:
Bottom Feeding: Margins are everything these days as companies try to gain efficiencies and squeeze more profits out of premium goods. But when you have a race to the bottom in prices (and frankly, quality) there’s not much margin to be had. So what do you do if sales disappoint — raise prices and lose your core connection with customers, or try to push impossibly low prices even lower?
Location, Location, Location: Walmart’s domestic operations play into this bottom-feeding mentality with geography, too. WMT is focused on some of the areas that have been slowest to recover from the Great Recession — rural communities without a lot of jobs or income. For instance, Walmart has more than 65 Supercenter locations in Mississippi, but according to the Bureau of Labor Statistics, Mississippi has the third worst unemployment rate in the nation — around 9.1% as of April. If you focus on slow-growth areas in America, your retail operations will naturally be slow-growth, too.
Online Gap: Walmart has been trying to make a big push into e-commerce to fight this geographic limitation — and ideally to boost margins as well. In its latest quarter, e-commerce sales did jump a great deal, rising 30% year-over-year. But Internet Retailer pegs online revenue projections to just $10 billion in 2013 for Walmart — for a company that does a mammoth $460 billion in total sales, that’s a measly 2%. So investors shouldn’t get too ginned up over the “growth” here, because there is plenty of room … and plenty of other operations that are dragging WMT down despite this improvement.
International Stagnation: Same thing for international sales — at $33 billion they are more substantial than online operations, but still a single-digit percentage of total revenue. Oh, and international growth was a paltry 2.9% in the latest quarter, so it’s not even like this smaller segment is booming. Consider that while other multinationals are tapping into China big-time, WMT generates just 2% of total revenue from China operations. Furthermore, buyouts of international merchants — including Sun-Art in China and Massmart in South Africa — juiced numbers immediately but haven’t seen continued momentum. With the small online footprint and sluggish U.S. sales, Walmart needs international growth more than ever … but isn’t finding it.
There are other concerns, too, including alternatives like Dollar General (DG) and Dollar Tree (DLTR) that continue to siphon off customers, or the fact that the law of large numbers has made any significant growth all but impossible for a retailer of Walmart’s size.
But the numbers remain the biggest proof that investors should steer clear.
The latest trouble was WMT’s first-quarter financials. Walmart earnings hit the market last week and the stock dropped about 2% immediately thanks to weaker-than-expected revenue and profits. Total sales eked up just 1% to $114.2 billion on the quarter, and profits were up just 4.6% to miss forecasts by a penny.
Also ugly: Same-store sales fell 1.4%, excluding Walmart’s gas pump business. Same-store sales are crucial because they show how existing business is doing beyond growth plans that result in a temporary pop, and with a history of nine consecutive quarters of same-store sales declines after the Great Recession … well, Walmart stock doesn’t have a lot of leeway with many investors.
Management doesn’t apparently care too much, though. The excuses they bandied about for the soft numbers included Congress messing with the payroll tax, currency exchanges hurting international operations, delayed income tax returns for its customers and that old canard: bad weather.
Yeah, that ugly weather certainly held back the rest of Wall Street too, now didn’t it?
The bottom line for Walmart is the bottom line. And unless this company figures out a way to growth — at home and online and internationally — its best days are behind it and only incremental growth lies ahead.
That’s fine for the CEO and management, considering Walmart is entrenched enough to be satisfied with moving sideways for a while.
But as an investor, you might be wise to look elsewhere for opportunity.
- Walmart earnings in detail, complete with a corporate podcast! (Walmart.com)
- Matt Yglesias also explores whether Walmart is in trouble. (Moneybox via Slate)
- Stephanie Clifford writes about how WMT stock is feeling the chill as sales cool. (NYT)
- Also worth noting that “government assistance programs [that] pay for Wal-Mart American goods rose about 0.5 percent from the fourth quarter last year.” (NYT)
- The case for breaking up Walmart. (ForeignPolicy.com)
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.