Wal-Mart: Value Pricing And Excellent Growth Potential

Aug.15.14 | About: Wal-Mart Stores, (WMT)

Summary

Wal-Mart reported flat comparable store growth for its US and Sam's Club Divisions.

Find out Wal-Mart's exciting growth opportunities.

Wal-Mart stock price has struggled over the last year.

Wal-Mart has time to correct its lackluster US comparable store sales.

The company grew e-Commerce 24% this quarter.

Wal-Mart (NYSE:WMT) released its 2nd quarter earnings report yesterday. The company's stock price increased modestly (less than 0.5%) despite earnings per share declining from $1.23 for the second quarter last year to $1.21 for the second quarter of Wal-Mart's fiscal 2015. Wal-Mart also revised its fiscal 2015 EPS guidance downward from between $5.10 and $5.45 to between $4.90 and $5.15. Wal-Mart has suffered poor performance over the last 12 months. The company's stock price is down about 5% over the last 12 months, despite strong share repurchases and large gains in the overall market.

Source: Wal-Mart 2Q Earnings Release

Who Moved My Cheese? Comparable Store Traffic Analysis

Wal-Mart has had a difficult time increasing same store traffic over the last several quarters domestically. The company posted its first non-negative Wal-Mart US comparable store sales growth numbers in 6 quarters. The company has not increased comparable store sales in its flagship US Wal-Mart stores since the fourth quarter of the company's fiscal 2013.

Sam's Club has fared better than Wal-Mart US, but has still seen mediocre comparable store sales growth. The company had flat comparable store sales growth this quarter, following 2 consecutive quarters of declines.

Comparable Store Sales

Quarter

Wal-Mart US

Sam's Club

2015 Q2

0.00%

0.00%

2015 Q1

-0.01%

-0.50%

2014 Q4

-0.40%

-0.10%

2014 Q3

-1.30%

1.10%

2014 Q2

-0.30%

1.70%

2014 Q1

-1.40%

0.20%

2013 Q4

1.00%

2.30%

Click to enlarge

Source: Sure Dividend

Wal-Mart's International division had significantly better comparable store sales results than its US based operations this quarter. Brazil in particular has done well this year, achieving double digit comparable store sales growth through the first half of Wal-Mart's fiscal 2015. The company's comparable store sales for its top 5 international markets are shown below.

Comparable Store Sales

Quarter

UK

Canada

Mexico

Brazil

China

2015 Q2

2.00%

1.90%

0.20%

9.70%

-1.60%

2015 Q1

-1.50%

-2.60%

-1.40%

4.40%

-2.50%

Click to enlarge

Source: Sure Dividend

Wal-Mart's domestic comparable store sales have been disappointing for the recent past. The company has suffered from stocking issues. Further, public perception of Wal-Mart is generally not positive in the US. The company still has a strong base of customers, however, and is still by far the largest discount retailer in North America.

Roll Back The Negatives: How Wal-Mart Plans To Improve US Operations

Wal-Mart US' CEO Greg Foran announced today that he expects comparable store sales in the US to be flat for next quarter. His vision is to return the stores to growth by leveraging what has made Wal-Mart great: low prices and a wide assortment of merchandise. One of the reasons Wal-Mart incurred increased expenses in the most recent quarter was due to additional employees stocking overnight. Wal-Mart US appears to have corrected its mistake of cutting its workforce to thin, resulting in stocking issues.

The bright spot for Wal-Mart US this quarter was its strong comparable store sales growth in its neighborhood market stores. Neighborhood market store comparable store sales were up 5.6% in the most recent quarter, significantly outpacing other Wal-Mart US stores. Neighborhood market stores are about one quarter the size of Wal-Mart super center stores. They focus on grocery items as opposed to the 'one-stop-shop' that is a Wal-Mart super center. Wal-Mart is on track to open between 180 and 200 new neighborhood market stores in the US this year.

As Wal-Mart has had success with going smaller, it has unveiled a new concept. Wal-Mart express stores are about one tenth the size of its super centers. They are similar to corner drug store locations [think CVS (NYSE:CVS) and Walgreen (WAG)], except they have dollar store pricing [think Dollar General (NYSE:DG) and Family Dollar (NYSE:FDO)] and offer gas for drivers to fill up their cars. Wal-Mart has a pricing advantage over other discount retailers due to its massive size. The express store concept will allow Wal-Mart to "fill in the gaps" between its larger super center stores, opening up a new growth market for the company in the US. Wal-Mart is still testing its express store concept. The company plans to open about 90 new locations in fiscal 2015. Wal-Mart US CEO Greg Foran said they have seen "continued solid comp sales performance" out of Wal-Mart express stores in the company's conference call.

Wal-Mart can grow sales in the US through rolling out smaller stores and improving the operations of its existing stores for near to mid term growth. The company's most exciting long-term growth opportunity in the US lies with its e-Commerce division.

E-Commerce: Explosive Growth Continues

Wal-Mart grew e-Commerce sales 24% in the second quarter compared to the second quarter of last year. The company managed to gain sale in the competitive U.S. e-Commerce market. The company recently redesigned its website layout to offer more convenient e-Commerce shopping. It further recently released its Savings Catcher which gives customers the difference of prices on items purchased at Wal-Mart if Wal-Mart did not have the lowest price. The savings catcher is another way to tell customers "we have the lowest prices, and we will prove it to you".

In addition to double digit e-Commerce growth in the US, Wal-Mart also saw double digit e-Commerce growth in Brazil, Mexico and Chile. More impressively, Wal-Mart saw triple digit revenue growth in Canada and Argentina. The company is bolstering its e-Commerce division by acquiring talented workers through buying out smaller tech businesses. Recent acquisitions include Adchemy, Stylr, and Luvocracy. Wal-Mart is expecting e-Commerce sales to grow by 25% over full fiscal 2015.

Looking Forward: Expected Shareholder Return

Shareholders of Wal-Mart can expect solid returns going forward. The company currently has a dividend yield of over 2.5%, and repurchases about 2.5% of its shares outstanding per year. Shareholders of Wal-Mart can expect a return of about 5% from dividends and share repurchases alone.

The company has managed to grow its total selling square footage by about 3% a year over the last several years. If comparable store sales remain constant, this adds another 3% to shareholder return per year.

Wal-Mart is expected to deliver flat comparable store sales next quarter. As the company continues to expand overseas and implement improvements domestically, its same store sales should rise. If the company achieves comparable store sales increases from 0% to 3% per year, shareholders of Wal-Mart can expect a total return of 8% to 11% from dividends and share repurchases (5%), store count and selling square footage growth (3%), and comparable store sales increases (0% to 3%).

Wal-Mart Is A Buy For Long-Term Investors

Wal-Mart's recent lackluster comparable store sales in the US are not cause for alarm. The business has managed to see flat comparables this quarter, and is on track to maintain comparable store sales while expanding its store count. Wal-Mart has growth potential domestically from its new smaller store concepts and e-Commerce. The company continues to grow internationally, with especially strong performance in Latin America.

Wal-Mart is a strong buy based on The 8 Rules of Dividend Investing. The company has a low P/E ratio of 15.36, well below the S&P 500's P/E ratio of around 19. Further, the company has a solid dividend yield of nearly 2.6% combined with a 10 year revenue per share growth rate of over 8%, and extremely low price volatility. Wal-Mart is a buy for patient long-term investors who are focused on total return and stability.

Disclosure: The author is long WMT. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.