Wal-Mart (WMT) is one of the most successful companies in the history of the U.S. 2013 was full of ups and downs for the company, and as the year is about to come to an end, Wal-Mart is up 10% compared to S&P 500, that is up 28%. Obviously, 2013 was not the year of Wal-Mart as investors were worried about slowing growth and global issues. Will 2014 be the year of Wal-Mart? Let's take a look.
Uncertainties in the economy
In the U.S. and elsewhere, many economic uncertainties remain and Wal-Mart relies heavily on consumers, their confidence and their buying behavior. Europe is slowly coming out of recession while the American economy continues to get stimulated with quantitative easing, which didn't help much with job growth but seems to have helped with bringing the unemployment rate down (those who haven't looked for a job in a while are not considered in the unemployment count and this is pretty much what accounted for the drop in the unemployment rate in the last year, while the job growth barely kept up with the population growth. This is evidenced by the job participation rate which remains near all-time low levels). Having said that, Wal-Mart can still prosper as it has already proven that it continues to perform well in economically difficult situations by attracting cost-conscious consumers with its attractive prices.
Wal-Mart's improving margins
Last quarter, Wal-Mart saw some margin expansion as the company's American operating income rose by 6%, Sam's Club's operating margin rose by 9% and international operating margins rose by 8% after controlling for the effects of currency. This is definitely good and shows that Wal-Mart can increase its margins to offset some of the volume weakness, even though it continues to offer competitive pricing. In the next year, Wal-Mart will try to squeeze more margins out of its supply chain, logistics and operational efficiencies as the global economy takes another shot at improving.
Adding to the store count
Sam's club continues to add new stores and the existing stores continue to post comparable sales growth and I don't expect this to change in 2014. In the last quarter alone, there were 13 new Sam's club openings in the U.S. and this rate isn't likely to slow down anytime soon. Wal-Mart's regular stores continue to post single digit growth and it is not likely to accelerate much until the global economy improves significantly; however, it is not likely to slow down much either.
In 2014, Wal-Mart will continue to increase the amount of fulfillment centers it has across the U.S. in order to grow its e-commerce business at meaningful levels. In the last quarter, this particular business posted 40% growth and the company added a large fulfillment center in Texas in order to address a growing need. In 2014 and beyond, this will be one of the company's biggest growth drivers as more and more people do their shopping online as opposed to actually going to stores. Currently, Wal-Mart's e-commerce business is active in 10 countries and there are many more countries where an expansion is possible in the next year or two as the company continues to invest in growth. Unlike Amazon (AMZN), Wal-Mart's growth is profitable growth, which many people said was impossible to achieve. A lot of people say that you can't attain strong growth and profitability at once, but Wal-Mart has been doing that since the 80s.
Increasing flexibility and resiliency
In the recent months, Wal-Mart ran two campaigns named 'Stock-up and Save' and 'October Savings' where it was able to offset or greatly limit the effects of the government shutdown as it attracted more volume than usual. This shows me that despite its massive size, Wal-Mart is very flexible in terms of offsetting any weaknesses it sees in the market by being proactive about it.
While margins are important, Wal-Mart can't squeeze every penny it can by keeping inventories and numbers of employees low. This year, there were a lot of complaints about how consumers couldn't get enough help from the employees, how cashiers were processing people slowly and how it was difficult to find the items people were looking for because Wal-Mart simply didn't have enough employees and its existent workforce was thinly spread. It seems like Wal-Mart heard the message loud and clear and it ramped up its employees and inventories in the last quarter in order to prepare for the holiday season as well the year 2014. The company has also invested in self-checkout machines and other devices to improve the customer experience and the speed at which customers can be served.
Returning cash to shareholders
Wal-Mart still has about $12.2 billion left in its buyback program and the company is expected to spend another $1.5 per quarter on dividends at the current rate. As the profits improve, I can expect Wal-Mart to buyback more shares and pay more in dividends. Currently, the company's dividend yield is around 2.36% and it has a long history of raising dividends for decades. Currently, the company sells for 15 times its past earnings and 14 times forward earnings.
Wal-Mart is a rather safe bet and while it is difficult for it to go up 30% in a given year, it also has a low risk of crashing badly if things go bad. This year was an exceptional year for the overall market, and it performed extraordinarily, but there is a small chance that the next year will be the same. In a year where the market doesn't perform at a +25% rate, Wal-Mart is likely to meet or beat the market with its performance. While Wal-Mart isn't for everyone, it will continue to provide value to conservative investors in 2014 and beyond.