Investors in Wal-Mart Stores (NYSE:WMT) have seen their investment underperform significantly over the past year as shares are trading roughly unchanged compared to last year.
After strong growth in the nineties and solid growth over the past decade, the retail giant is currently struggling to report flat revenues. While the company is launching new initiatives to combat this, the impact is still very much limited to the top and bottom line.
At the same time, foreign bribery charges and a continued discussion surrounding employee pay and minimum wages continues to feed negative momentum.
The valuation is not appealing at this point in stage in my opinion.
First Quarter Headlines
Wal-Mart reported first quarter revenues of $115.0 billion which is up by 0.8% compared to last year.
Higher operating expenses and interest expenses put pressure on the profitability of the business as Wal-Mart reported a 5.1% drop in net earnings which came in at $3.58 billion.
As a result of share repurchases the drop in earnings per diluted share was limited to 2.6% with earnings falling by three cents to $1.11 per share.
Looking Into The Operations
Like every retailer, Wal-Mart suffered from the harsh winter which impacted earnings per share by $0.03 per share. This put pressure on topline revenues, so did adverse currency movements which shaved off $1.6 billion in net sales.
Excluding this impact, revenues would have been up by 2.1%. Like more retailers, Wal-Mart is focusing on lucrative membership fees which rose by 4.8% to $793 million over the past quarter.
US comparables fell by 8 basis points while the neighborhood market format reported a 5% increase in comparable store sales. International sales fell by 1.4%, yet in constant currencies would have been up by 3.4% as currency movements had quite an adverse effect.
A bright spot were e-commerce sales which rose by a solid 27% over the past quarter. The well known possible violation of the Foreign Corrupt Practices Act in foreign operations cost the company another $53 million over the past quarter. Earlier this year, Wal-Mart announced that e-commerce sales surpassed the $10 billion annual mark.
Weak Second Quarter Guidance
Wal-Mart issued a rather disappointing outlook for the current second quarter with earnings from continuing operations seen between $1.15 and $1.25 per share which compares to last year's earnings of $1.24 per share.
Higher investments in e-commerce, higher healthcare costs and Sam's Club membership investments will put pressure on profitability.
Given that weather has normalized, it is rather disappointing to see an expected drop in earnings for the second quarter given that earnings in the first quarter were unchanged after being corrected for weather impacts.
Wal-Mart ended the quarter with roughly $6.0 billion in cash and equivalents while total debt stands at $55.5 billion, including capital lease obligations. This results in a rather sizable net debt position of about $49.5 billion.
For the fiscal year of 2014, Wal-Mart reported revenues of $476.3 billion on which it reported earnings of $16.0 billion. Trading at $77 per share, Wal-Mart's equity is valued around $248 billion which therefore values equity in the business at roughly 0.5 times annual revenues and 15-16 times annual earnings.
The quarterly dividend of $0.48 per share provides investors with a 2.5% dividend yield at the moment. The company repurchased 8 million shares for $626 million over the past quarter, retiring shares at a rate of 1% per annum.
Takeaway For Investors
Investors are obviously not pleased with the results despite softening conditions related to weather and adverse currency movements. The lack of sales growth in the US in particular has been going on for a while and new initiatives like the Neighborhood Market and e-commerce sales cannot make up for the stagnation in its core business.
Cuts in the Supplemental Nutrition Assistance Program took a toll on business as well with a substantial percentage of shoppers relying on food stamps, which includes many of its own staff. The big elephant in the room of course is the discussion about minimum wages, which could impact Wal-Mart greatly being the employer of 2.2 million workers across the globe.
Given the poor publicity, the more than fair valuation at 15-16 times earnings, the lack of growth and sizable debt position, I remain very cautious.
Despite a solid dividend yield, I do not believe that shares are appealing at current levels.
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.