Wal-Mart Stock Will Rise Again

| About: Wal-Mart Stores, (WMT)

Summary

It is true that Wal-Mart has not increased net profits since 2008.

The Jet and ShoeBuy acquisitions demonstrate that Wal-Mart is finally committed to developing a meaningful web presence.

Furthermore, the development of an "Amazon Go" platform that does not require checkouts may eventually be adopted by Wal-Mart to cut costs.

I understand why Wal-Mart (NYSE:WMT) suffers from poor investor sentiment. After delivering 21.5% annual returns from 1972 through 2008, corporate profits stopped growing. Wal-Mart, which earned $13.5 billion in 2008, is only expected to earn $13.5 billion this year. Perhaps most distressing is that the store count increased from 7720 in 2008 to almost 12000 now and Wal-Mart couldn't get any extra net profits out of it.

The earnings per share growth from $3.42 in 2008 to $4.35 in 2016 is purely the result of stock repurchases that have taken the share count down from 3.9 billion to 3.1 billion. So while Wal-Mart has been buying back stock to engineer its way to anemic growth, everyone can simultaneously see Amazon (NASDAQ:AMZN) moving at warp speed with its revenue that has increased from $10 billion in 2005 to $135 billion in 2016. The prevailing sentiment seems to be that Amazon will do to Wal-Mart what Wal-Mart did to Sears and what Sears did to A&P and Woolworth before that. Is this just the next stop in the trend of the winner-take-all that has characterized American retail for the past century?

Before you pen Wal-Mart's obituary, you should consider at least two things: (1) the corporation seems to have recently awoken to the e-commerce game, and (2) it can take advantage of Amazon's innovations in the grocery store space to dramatically reduce its own costs.

First, you should consider the fast e-commerce growth that the acquisition of jet.com brings to help Wal-Mart compete with Amazon. Jet is just about the only budding alternative that has risen in the Amazon era, and Wal-Mart now has access to all of that human capital internally. It is clear that Wal-Mart's bench of executives did not possess a special expertise to compete with Amazon effectively, so it sought an external solution that would address this weakness.

Early signs seem to indicate that this just might work. Jet reported 20.6% sales growth last quarter. This is the first time, perhaps ever, that Wal-Mart has some good news on the e-commerce front to report. It can point to some aspect of its next frontier and say, "Look, there's double-digit growth!"

Wal-Mart has also purchased the teensy, tiny shoe company ShoeBuy for $70 million. If Wal-Mart can continue to make a series of bolt-on niche e-commerce acquisitions, and then put them all under one e-commerce umbrella, and integrate distribution with its existing brick-and-mortar operations, you can finally envision a path by which Wal-Mart sustains relevancy with its business model. After years of watching Amazon lead on the innovation front, Wal-Mart is finally making counter moves.

The difficulty will be getting customers to make that first purchase that establishes an account. My advice would be to create a centralized "Wal-Mart account network" in which the same log-in information is shared across platforms, in which you can make purchases on Wal-Mart, Jet, and ShoeBuy with the same credentials. A cohesive network of unified sites could facilitate those whimsical purchases that have propelled Amazon to prominence. If Wal-Mart gives brick-and-mortar customers coupons for purchases on Jet or ShoeBuy, it can leverage its entrenched business lines to incentivize customers to make that "first purchase" on its internet properties.

And secondly, you should consider that Amazon's technological innovation in the grocery business may prove useful to Wal-Mart (perhaps a real-life example of a rising tide lifting all boats). Much has been made of the "Amazon Go" launch in which grocery store customers will be able to enter a store, put some items in a bag or cart, and have the cost automatically debited without having to check in. The subsequent innovation will likely be self-stocking shelves via robots that respond to inventory algorithms.

Although I do not want this to happen, it seems likely that Wal-Mart will be able to leverage similar technologies in the near future to dramatically reduce its head count. Grocery has always been a low margin business because it required a high body count. If that ceases to be the case, the historical assumption that grocery stores make money by pursuing high volumes and tolerating low margins may need a 21st century revision.

Wal-Mart currently has 2.3 million employees. If a world of self-stocking shelves and automatic checkouts is in the offing, I estimate that the company could reduce its headcount to a few hundred thousand. That would completely change retail economics. Even earning minimum wage, those 1.5 million employees cost about $84 million per day. That represents about $20-$25 billion in annual expenses that may prove cut-able.

You know tobacco stocks have performed well for decades even as tobacco volumes have steadily declined? Something similar could happen in retail. A business like Wal-Mart could increasingly lose market share to Amazon, but it could end up cutting its own costs by a rate that is greater than the business that is lost.

The doom and gloom about Wal-Mart is not fully warranted. It earns $13.5 billion per year, and only pays out about half of that in dividends. This means that Wal-Mart has about $6-$7 billion per year that it can use to prepare for the future. It has already taken a meaningful step down this road by purchasing Jet and ShoeBuy. And secondly, Amazon's innovation in the sector may provide an unexpected benefit once Wal-Mart begins executing upon similar technologies. The shareholders of Wal-Mart might be in a better position than you think.

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.

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