Shares of Wal-Mart (NYSE:WMT) have skyrocketed this year alone, soaring from $55/share in 2012 to its current $81/share. Shareholders and investors have remained very skeptical on why share prices have gone up so much; there is relatively no growth, and decreasing net income. Wal-Mart is seeing increased competition in the store and out of the store. Wal-Mart has to get its game on as it is continuing to lose market share. After a 14% rally this year alone, shares of Wal-Mart are sitting at not only a 52-week, but also an all-time high. In this article, I will describe why I believe Wal-Mart will continue to skyrocket. So the ultimate question is: Will Wal-Mart win this year's Super Bowl?
Recent Earnings Report and Fundamentals
A few weeks back Wal-Mart released its Q3 earnings report, and there was only one reason why investors weren't so gloomy about it and that was because Wal-Mart repurchased its stock. If it weren't for the repurchasing, investors would have been furious because Wal-Mart missed revenue estimates and it lowered guidance for the fourth quarter. The retailer's net sales also rose about 2% to $114.9 billion. Wal-Mart stated that revenue came up short mainly due to currency fluctuations and without these fluctuations; it would have had sales of $116.2 billion. The best parts were the increases in operating income as Wal-Mart's rose 5.8% and Sam's Club's rose 9.2%. The company bought back 23 million shares during the quarter for $1.7 billion, and management expects to earn $1.50-$1.60 per share in Q4 and $5.01-$5.11 for the full year. Retail guru Brian Sozzi of Belus Capital Advisors said the following about how he felt about Wal-Mart, "At investor day in October, this Wal-Mart stat stuck with me: 300 or so Wal-Mart U.S. stores were producing negative same-store sales of around 7%."
The company is also strong fundamentally. For the nine months ended in October, net cash from operating activities came in at $13.3 billion and capital expenditures were $9.5 billion, resulting in free cash flow of $3.8 billion. Wal-Mart is continuously looking to increase its revenue base and reduce its expenditures. Wal-Mart has set a company goal to reduce operating expenses by 2017. As far as dividends go, Wal-Mart has also increased its dividend for 39 straight years. Wal-Mart's share repurchase program has been phenomenal as they have decreased common shares outstanding almost every year.
Black Friday Game Plan
Wal-Mart is aggressively trying to win this year's Black Friday brawl. Wal-Mart's chief marketing officer Duncan MacNaughton said, "Black Friday is our Super Bowl, and we plan to win." Wal-Mart has altered the game plan for all shoppers and retailers alike. Changing its price matching policies, Wal-Mart says that it will price match any of its competitors.
Wal-Mart opened at 6:00 on Thanksgiving, two hours earlier than last year, and four hours earlier than in 2011. Many of you may wonder whether or not opening on Thanksgiving really makes a bottom line difference, and yes it does. According to the National Retail Federation, shopping on Thanksgiving Day 2013 drew nearly 45 million consumers, up 27% from 2012 when 35 million bargain hunters hit the stores. Putting this into perspective, Wal-Mart was able to capture market share that some of its competitors were not able to do such as Costco. Wal-Mart's website processed more than a billion page views during the period.
This past Monday Wal-Mart announced that current CEO Mike Duke will be replaced by Doug McMillon in February. McMillon currently serves as the head of Wal-Mart's international business. McMillon has been called by Wal-Mart to help Wal-Mart restore sales growth, which has struggled ever since online retailers such as eBay and Amazon have successfully taken many valuable customers. The need for a new CEO could also improve Wal-Mart's declining sales, and could even help it in overseas markets. Wal-Mart is currently pushing for expansion in China and other markets, but has faced bribery charges in Mexico and India slowing growth down in those markets.
For these reasons, the Walton family decided to pick Doug McMillon, a man who would be ideal in helping Wal-Mart reach its online and international potential. I personally like McMillon because he started out as a sales associate in 1984, and he has achieved his position.
Wal-Mart vs. Competitors
Throughout the years, Wal-Mart has seen increased competition from companies like Costco (NASDAQ:COST) and Target (NYSE:TGT). During Q3, Target's revenue increased by 2% which shareholders were very happy about. However, this increase in revenue diminished Target's net income which fell by 13% to a grand total of $611 million. This dramatic decrease primarily occurred because the retailer's cost of goods sold rose to 68.6%.
Costco had even worse results, as sales of the wholesaler only rose by 0.8% to $32.49 billion. Net income barely went up any as it rose by only 1.3% on higher revenue. Wal-Mart has grown revenue and net income by 16% and 26.9%, respectively, over the past couple of years alone; Costco has run over it with growth of 47.2% for revenue and 87.8% for net income.
Wal-Mart continues to suffer online. Online sales only grew 40% last quarter, and according to some reports are likely to reach just $10 billion this year. Wal-Mart is expected to do $480 billion in sales this year, so 2% is not very much. Wal-Mart International, which accounts for about 25% of Wal-Mart revenue is also expected to do better due to improving market conditions and expansion.
Wal-Mart does not have the growth that many of us are used to seeing with technology stocks; however, the company has been honest with investors as it has kept its promise by consistently increasing its dividend, which now stands at 2.4%. The likelihood of Wal-Mart doing something amazing is very small, but Wal-Mart's stock is a good place to keep your money in. Dividend investors and normal speculators can play it safe with this stock.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.