Wal-Mart (WMT) is having a mellow roller coaster year, bouncing between $70 and $80 per share. The 2013 Q3 earnings report EPS was only a penny higher than analyst estimates but the stock remained flat near a 52 week high following the news. It's unclear why the discount retailer hasn't promoted its move into solar-powered stores to mainstream media since solar is such a hot industry and means lower energy costs for the future. The stock is trading higher than its 2012 range between $55 and $65.
2013 Q3 Earnings
The only reason Wal-Mart beat by a penny was due to its stock repurchasing. Otherwise, revenue missed estimates and it lowered its guidance for the fourth quarter. The company's net sales rose only 1.6 percent year over year to $114.9 billion. Much of the report was flat including guidance for the holiday season at Sam's Club. The main bright spots for Wal-Mart and Sam's Club were increases in operating income of 5.8 and 9.2 respectively.
During the third quarter Wal-Mart bought back about 23 million shares valued at $1.7 billion and paid dividends valued at $1.5 billion. Free cash flow year over year dropped from $7 billion to $3.8 billion. Despite a flat quarter for global sales, U.S. sales grew 2.4 percent to $67.68 billion year over year and 1.6 percent sequentially.
Holiday Season Strategy
Following an upbeat holiday season forecast from Macy's (M), Wal-Mart indicated that it would aggressively promote its brand for the holidays. In the earnings call Executive VP Bill Simon promised that store shelves in the U.S. would be stocked with "the most popular toys" with guaranteed low prices all season. He went as far to say that "the team has developed our best holiday plan ever." The company's guidance points to flat comp store sales during the period, as compared with a 0.3 percent increase last holiday season.
Wal-Mart serves the lower end consumer with discounts while Macy's targets higher end customers. Discounts will no doubt remain the key to Wal-Mart's brand regardless of what date it is on the calendar. There was nothing in the company's forecast to get excited about that could create a boom in the stock for December or January. It sounded like a defensive guidance that acknowledged competition and uncertainty for the low end customer, as there was no specific strategy mentioned to back the vague comment that the company will "win for our customers and shareholders." That's supposed to be a given for any business.
Wal-Mart has been the top user of solar power among the corporate world, as four percent of its electricity comes from the sun. The company has entered power-purchasing agreements with solar developers who install, own and operate electric systems powered by solar panels on store roofs. Wal-mart benefits from securing low cost energy rates. In the second quarter the chain increased its installations by 40 percent. It now generates 89 megawatts, which is enough to power over 20,000 homes.
Solar is a key to energy savings in the future. Other companies that operate big buildings including Costco (COST), Apple (AAPL), IKEA and Kohl's (KSS) are doing the same thing, which shows they are planning ahead instead of going the route of big box stores and casinos that are suffering from high energy costs cutting into profits. It is not hard to imagine many big stores going away, especially after seeing Borders, Books and Music go out of business and the downsizing of Best Buy and Sears. Wal-Mart, on the other hand, is preparing for survival by generating its own electricity.
Retail is tricky because consumer confidence has wobbled up and down in 2013, according to ratings by Roy Morgan Research, which has published weekly figures for over four decades. In the first quarter the rating stayed flat. In the second quarter consumer confidence slipped slightly and then was volatile in the summer, peaking in the second week of October then tapering off. On average, consumer confidence is usually highest in the first quarter following the holiday season, although December tends to be stronger than November. In 2013 September, October and November have been above average strong months for consumer confidence.
Even though Wal-Mart seems like it's not growing fast enough as the stock lags both the overall market and in retail sectors, it certainly has not reached the end of the line for investors. The company has stayed relevant to investors by growing its dividend, now at 2.4 percent. This stock is probably not going to do anything spectacular in the next several quarters since all indications point to more of the same narrow range trading. But dividend investors may find it a safe play for steady income while hedge funds and swing traders may be attracted to its predictable support and resistance levels.