Wal-Mart Stores (WMT) has delivered a healthy financial performance in the past. I believe the company remains an attractive investment option, as its efforts to expand internationally, its plan to increase the number of its small stores, and attractive share repurchases augur well for the stock price. Also, based on my price target of $87, the stock offers potential price appreciation of almost 20%.
WMT reported soft financial results for 2Q2013. The company reported net sales of $116.2 billion, up 2.4% YoY, missing analyst consensus estimates of almost $119 billion. Unfavorable currency movements shaved away 0.4% from total revenues for the recent second quarter. In the recent quarter, comparable store sales in the U.S. dropped by 0.3% YoY; comparable store sales in the U.S. declined for the second consecutive quarter following six quarters of growth. Revenue for the recent quarter was adversely affected by weak consumer spending. Also, the prevailing unemployment situation and a 2% increase in the payroll tax resulted in weak revenue growth for the recent second quarter.
The company posted satisfactory earnings per share for 2Q2013 of $1.24, up 5.1% YoY, in line with what analysts were estimating. An EPS of $1.24 for the quarter was also in line with the company's earnings guidance range of $1.22-$1.27 for 2Q2013. WMT experienced a gross profit margin improvement of 20bps to 24.75% in 2Q2013.
Last month, WMT announced its free holiday layaway program for 2013, with no opening fee. This year's program is a continuation of last year's extremely successful program. Sales for the holiday layaway program of 2012 were up 10% YoY. WMT is also planning to expand its item offerings by 1,000 this year. Given that there is no opening fee for this year's layaway program, as compared to $5 last year, incremental traffic to the stores will be boosted in the last two quarters of 2013. The program will start from September 13th and last till December 13th.
Key Growth Drivers
The e-commerce platform provides robust growth opportunities for the company. Recently, the company announced to ramp up its online operations in Brazil. Brazil is Latin America's largest economy and among the four priority e-commerce markets for WMT. In Brazil, online sales for the company are expanding at a rate of more than 50%, twice the rate of the industry's average growth. Brazil's online sales grew by almost 24% in 1H2013, and are projected to grow further by 120% in 2H2013 to $11.7 billion for the full year (2013). On-time deliveries of online sales remain among the key factors behind the company's recent success in the country, as other competitors in the industry fail to meet guarantees for making deliveries on time. To further improve upon its operations in Brazil, WMT is aggressively working to expand its operational network. The company is targeting to import those items that are unavailable in Brazil, and is planning to add additional distribution centers to make deliveries faster. "The potential for growth in e-commerce in Brazil is very big," said Flavio Dias, the vice president for Wal-Mart's Brazilian online sales.
I believe that Brazil's e-commerce market offers attractive growth potential and remains an important long-term earnings driver for the company. As WMT further expands and improves its operations in the country, it will be able to tap into a greater market share and strengthen its market position.
Small Stores Expansion
To secure a greater market share and grow its bottom line results, the company has been following the concept of small stores known as 'neighboring market stores ' and 'Walmart Express'. As the company continues to add new small stores, it will strengthen its position in the market and boost its future growth rate. The concept of small stores is becoming popular in the U.S., as it is more convenient and quick for customers to access their neighborhood market stores. Sales for the company's small stores increased by almost 30% YOY in 2Q2013. WMT has plans to double its neighboring market stores to 500 by the end of 2016.
WMT has been working aggressively to expand its international market presence; it is expected to spend $450 million in expanding and upgrading its store network in Canada this year (2013). China is another market where WMT has been pushing hard to expand its business. The company plans to open more than 100 new stores in China by 2015, and it is expected to open 30 new stores in 2013 alone.
Dividend and Share Repurchases
WMT has been sharing its successes with its shareholders through a decent dividend yield of 2.60%. Also, the company has been repurchasing its shares at an impressive rate over the years; it has repurchased almost 15% of its total shares outstanding in the last 4 years. In 2Q2013, it returned $3.4 billion to shareholders through dividends and share repurchases. As the company continues to repurchase a portion of its shares outstanding, this will magnify its ROE and boost EPS growth.
The company's management lowered its sales growth guidance range to 2%-3%, from the prior guidance range of 5%-6%. The sales growth is expected to slow down in 2H2013 due to foreign currency movements and weak consumer spending. It also lowered its full-year 2013 guidance range from $5.20-$5.40 to $5.10-$5.30. For the ongoing third quarter, WMT anticipates its EPS to be $1.11-$1.16. In contrast to the company's expectations, analysts have projected a high yearly growth rate of 9.10% for WMT for the next five years.
Despite the weak financial results reported by the company for 2Q2013, I remain bullish on WMT. The company has a strong business model and retains its low cost leadership in the industry. Also, its international and e-commerce expansion efforts, growth of small stores, and impressive share repurchases are likely to bode well for the company.
Moreover, based on my price target of $87, the stock offers a potential price appreciation of almost 20%. I calculated a price target of $87 using the S&P 500 forward P/E of 15.05x and CY 2014 analysts' EPS forecast of $5.73.
S&P 500 Forward P/E
CY 2014 EPS est.