Wal-Mart (NYSE: WMT) shares were down more than 3% through midday Thursday, despite reporting Street-beating quarterly EPS results. Investors reaching for answers today regarding the conflicting move can find that value-added explanation here.
The company beat on the bottom line, posting $1.18 per share from continuing operations, versus analysts' consensus expectations for $1.17. So what gives then? Some are likely pointing to a whisper number miss, but they would be remiss to think so. Rather, the devil is in the details of the reported data, as always, but not too deep this time around.
Net sales at $113.5 billion disappointed expectations for $115.8 billion. Though without currency impact, consolidated net sales would have measured $115.7 billion. Currency matters, though it may be harder than usual to account for in modeling today. Anyway, investors need to see gains on the top line to be assured of forward growth. The sales line item is the hardest figure to manipulate on the income statement, and always offers a relatively direct reflection of the business of the company in question. Thus, Wal-Mart couldn't hide its unsatisfactory performance against expectations today. The next question we have to ask is what caused the disappointment?
Wal-Mart's U.S. sales increased 3.8% on same-store sales growth of 2.2% excluding fuel, which fluctuates on volatile pricing. The same-store sales gain beat analysts' expectations for 2.1%, and marked the fourth straight quarter of gains. Wal-Mart has long since overcome the stumble it caused itself with the now overturned change in strategy that led it to veer from its everyday low pricing scheme. Still, there is a problem Wal-Mart continues to struggle with.
Even as it attracts shoppers from once higher income earners who have either lost their jobs or been forced to take jobs making less money, its core shopper is spending less or trading down to even cheaper goods than Wal-Mart offers. Wal-Mart has grown over the years, benefiting from its appeal to the nation's lowest income earners. But, with 8%+ unemployment, many of those folks are having an even tougher time of late. So, they are shopping at Dollar Tree (DLTR) and other dollar stores, or online at Amazon.com (AMZN) or eBay (EBAY), where value is found among new and used goods alike. I'm sure more Americans are making visits to pawn shops as well, like Cash America (CSH), either to pawn goods or to buy cheaper. So, as poor Americans get poorer, Wal-Mart loses some business even as it gains from the falling middle class. Besides this issue, the company of course has attracted intensifying competition over the years, and increasingly shares the pie with Target (TGT), Costco (COST) and old rival Kmart, owned by Sears Holdings (SHLD).
Wal-Mart's international business now drives a quarter of its total revenue, and unfortunately, some issues developed there this quarter as well. The company has slowed expansion in Mexico, as it works through a messy bribery scandal. The repercussions of the issue remain uncertain. Wal-Mart's slowing growth in Mexico serves a purpose, even if it's accidental. It serves to remind the nation of the store's importance to it before justice is served. Besides, without bribery to speed up real estate red tape, it's just going to take longer to get things done.
Also, Wal-Mart said it would slow its China growth in order to optimize the profitability of its stores in the fast growing and opportune region. These issues are now being worked into the valuation model for Wal-Mart, and so the stock is penalized. Still, the company managed 6.4% growth in sales overseas this quarter, as it benefits from the right business model for a struggling world.
As a Wall Street analyst, I had to be quick thinking and discern rapidly what was moving the stocks I followed. My work didn't end there though, as I would then need to determine where the stock would move over the next week, month, year and beyond, and provide cogent advice for my clients. As a blogger, those skills remain, but my work is now available to all of you.
Wal-Mart did raise its EPS guidance, with an important hike in the bottom end of the EPS range. For the full year, the company now sees EPS of $4.83 to $4.93, up from $4.72 to $4.92. Unfortunately, the forecast only meets the analysts' consensus estimate for $4.93 per share. Obviously, a beat on the forecast figure would have helped the stock as well today. Thus, this probably played a key role in the stock's slide today.
I expressed some concern about Wal-Mart in my recent work on retailers for this tight economic situation, entitled, "5 Stocks to Own if Consumers Check Out." I was turned off by its valuation, since it had already recovered much ground since its operational stumble. Today, the shares trade at 14X my EPS estimate for the next 12 months ($5.15 per share). Yet, five-year growth is projected by analysts at just 8.3% and growth for FY 2014 (Jan.) is only projected at 8.9% for the large company. The PEG ratio is thus 1.6 on just the one-year growth forecast, and so I cannot recommend purchase today either. The stock appears to me fully valued, and this is the most important reason for the share decline today.