I have been saying for some time now that an investment in Wal-Mart (WMT) is dead money. Shares of Wal-Mart were down nearly 4% Tuesday as the stock has dropped to $53 per share. The company released earnings and the results were a mixed bag. The good news is that Wal-Mart had total revenues of $5.02 billion. Earnings per share came in at $1.41 a share. Both numbers are an improvement over last year’s Q4 numbers. Earnings rose 6.3 percent to $15.4 billion dollars. So, what’s the problem with Wal-Mart?
The company’s domestic sales are simply lackluster. Same store sales growth was down 1.8% this past quarter after declining 1.3% two quarters ago. This makes it seven straight quarters of negative same store sales growth. Next quarter, same-store sales for the first quarter are projected to be flat to negative 2%. Sales in the United States also declined in the quarter, by 0.5% to $71.1 billion. The company has no idea when domestic growth will be positive again at its Wal-Mart stores.
Wal-Mart is facing the same problems that every great discount retailer has faced. The company is the king of the industry so everyone is taking aim at them. Think about all of the great chains that have fallen from retail dominance in the United States to mediocrity over the years.
Former Retail Giants
Look at some of the former titans in retail:
- Sears (SHLD)
The discount retail market is very fickle. It is not like the luxury retail industry. Customers are not as loyal to companies and brands as they are to price. Now with the rise of dollar stores, Wal-Mart is facing more and more competition. I have stated previously the threat that companies like Family Dollar (FDO) and Amazon (AMZN) pose to Wal-Mart. There is also The Dollar Tree (DLTR), Dollar Store, Target (TGT), Costco (COST), and a ton of wholesale clubs.
Chief Financial Officer Tim Holley stated that the company
lost some of what we call the fill-in trip, where people were still coming to the store to do their big shopping trip, but when they needed bread, milk, detergent quickly, we did lose some of that. I think it’s probably the convenience and somebody that has low price points, and dollar stores would certainly fit that category.
When you derive over 60% of your earnings from the United States and those numbers are slipping, you just might need to refocus your efforts on domestic growth. I am not suggesting that Wal-Mart is going under. The retailer will always make money. I am suggesting that the growth days are over for the stock.
Is Wal-Mart A Growth Stock?
Wal-Mart will be a growth stock again if the company can grow its international brands into a larger percentage of the company’s earnings. International earnings are solid with sales increasing 8.9 percent to $31.4 billion for the quarter. This would help to replace the lower domestic growth.
Walmart’s other option is to accept the fact that the company is no longer a growth stock and increase its dividend payout to reward its shareholders. Long time shareholders have seen no capital appreciation and very low dividend payouts for years. Wal-Mart pays out 29% of earnings via dividend distributions. The payout wouldn’t be that bad if the company had growth.
The dividend payout is comparable to Target and Costco but the stock’s growth is not. Over the past 10 years, Costco’s stock is up nearly 80% and Target’s shares have risen 50%. Wal-Mart is up 2.5%. Wal-Mart has essentially been a low yielding bond for more than a decade.