Earlier this month, I wrote a piece on Wal-Mart Stores Inc. (NYSE:WMT) citing a hold with a $60 price target. Expectations were low going into earnings, as many were unsure how Wal-Mart would respond after being down 30% this year. I'm sure many investors were relieved and surprised when Wal-Mart posted positive sales numbers in the fifth consecutive quarter. That said, shares of Wal-Mart have rallied since then and now trade above my target of $60 per share.
Earlier last week, Wal-Mart reported earnings of $1.03 per share and revenues of $122.4 billion after currency adjustments. These numbers surpassed estimates, as analysts were expecting earnings of $0.98 per share and revenue of $118.1 billion. Furthermore, international net sales for the Company reached $34.7 billion followed by an increase in e-commerce sales of 10%. This is an important metric since it shows that Wal-Mart's investments are attributing to growth. Finally, comparable store sales and traffic in the US were up 1.5% and 1.7% respectively. The improved traffic numbers display strengthening in Wal-Mart's customer experience levels, which was an important driver I noted in the previous article.
Positive Grocery Comps
Despite lower food inflation this quarter, Wal-Mart was able to post its strongest sales in the food category. The Company was able to rally on positive Labour Day and Halloween sales. Fresh food was the key driver and an important category Wal-Mart has been working to improve on. Furthermore, the Company seems to be providing its customers with fresher produce, which is helping both sales and inventory levels. Overall, Wal-Mart is seeing a reduction in waste and an improvement in the Company's gross margin, both are factors that will lead to greater sales.
Mediocre E-commerce Growth
With Amazon (NASDAQ:AMZN) growing as a major competitor, Wal-Mart's e-commerce growth is absolutely essential to the longevity of the Company. This quarter, e-commerce operations only grew 10%, a noticeable difference compared to last year's growth of 22%. Furthermore, the Company has been heavily investing in these activities, making the results even more disappointing. Should we continue to see lesser growth in Wal-Mart's e-commerce business, it may be time for the Company to pursue an acquisition of some sort.
The Amazon Battle
One important factor I left out in the previous article is Amazon's dominance in e-commerce sales and why it serves as a large threat to Wal-Mart's business model. We are now looking at a new generation of parents who spend more time shopping online where they see cheaper prices and added convenience. Since 1999, Amazon has grown from a company with an annual revenue of $1.6m to $89 billion today. Furthermore, Amazon's market value has surpassed Wal-Mart's for the first time earlier this year. The shift in retail is extremely apparent and one that Wal-Mart must recognize. It seems like Amazon is doing what Wal-Mart did to the mom-and-pop stores a generation ago, run it out of business.
If we were to compare the two companies today based off of price, selection and convenience, Amazon seems to be the clear favourite in all 3 categories. It's hard for Wal-Mart to compete with Amazon due to their distribution model. In order to really compete with Amazon, Wal-Mart must find a way to cost efficiently deliver individual items to customers through their e-commerce site. It's a tall task for Wal-Mart to complete themselves, which will only seem possible if Wal-Mart teamed up with a technology company. Time is a sensitive issue, if the Company does not address the changing trends in the retail industry, it could soon become irrelevant.
I would like to maintain my hold recommendation for Wal-Mart while raising the target price to $64.00. This represents 6% upside from the latest close of $60.24. I think the company is heading towards the right direction. If Wal-Mart continues to invest dollars in its e-commerce platform and strengthens its customer experience levels, we should see the company bounce back. An acquisition of some sort to improve their online distribution network is the key to Wal-Mart's success. There's hope for the Company, as long as it's willing to put up a fight against Amazon.
Disclosure: I/we 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.