The retailer’s investment in its websites has paid off in improved online sales and earnings for the second quarter.
Wal-Mart’s shares were trading at $66 in January. The stock moved up to $74 in August, but fell as investors reacted to the company’s new strategic plan. That includes opening fewer new stores, and making new investments in its online operations.
The plan will slow Wal-Mart’s earnings for the next two years. However, it should position the company for many more years of growth.
WAL-MART STORES INC. (New York symbol WMT; www.walmart.com) opened its first store in 1962. It has since grown to become the world’s biggest retailer, with 11,573 outlets in 28 countries. These stores serve a total of 260 million customers each week.
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The company’s 5,300 stores in the U.S. include 3,504 supercentres. Through the sale of general merchandise and, increasingly, groceries, U.S. stores supply 64% of Wal-Mart’s overall sales. (Groceries themselves now account for more than half of U.S. sales.)
In 1991, the company opened its first store outside of the U.S. through a joint venture with a Mexican retailer. Its international division (24% of total sales) now operates 6,273 stores in 27 countries.
The remaining 12% of Wal-Mart’s sales comes from its Sam’s Club warehouse stores, which sell a variety of goods at wholesale prices. There are currently 655 Sam’s Club locations in the U.S. and other countries.
The company’s sales rose 8.8%, from $446.5 billion in 2012 to $485.7 billion in 2015 (fiscal years end January 31). However, sales fell 0.7% to $482.1 billion in 2016. That’s mainly because the higher U.S. dollar hurt the contribution of its international business. Excluding currency rates, sales gained 2.8%.
Earnings rose 9.5%, from $15.5 billion in 2012 to $17.0 billion in 2013. Per-share earnings gained 12.8%, from $4.45 to $5.02, on fewer shares outstanding. Wal-Mart’s 2014 earnings slipped to $16.7 billion in 2014, as it spent more on store upgrades. But earnings per share rose to $5.11 due to fewer shares outstanding.
Partly due to rising employee health care costs, Wal-Mart’s earnings fell to $5.07 a share (or a total of $16.4 billion) in 2015, and to $4.57 a share (or $14.7 billion) in 2016.
In its fiscal 2017 second quarter, which ended July 31, 2016, Wal-Mart’s sales rose 0.5%, to $120.9 billion from $120.2 billion a year earlier. Excluding currency rates, sales rose 2.8%. Online sales jumped 11.8%.
Earnings in the quarter increased 8.6%, to $3.8 billion from $3.5 billion. Due to fewer shares outstanding, earnings per share improved 12.0%, to $1.21 from $1.08. If you factor out unusual items, Wal-Mart earned $1.07 a share in the latest quarter.
The company recently outlined a new strategic plan. This involves opening fewer new stores in the next two years. Instead, it plans to spend more on renovating existing locations and expanding its e-commerce operations.
Wal-Mart opened 471 stores in fiscal 2016. It now expects to open between 331 and 351 new locations in fiscal 2017, and between 249 to 279 in 2018.
The company expects to spend $11.0 billion in each of 2017 and 2018 on these initiatives.
That includes doubling the number of warehouses that service online customers to 10. Combined with new technologies to better track goods in these facilities, Wal-Mart’s new warehouses should allow for one-day delivery to 70% of the U.S. population.
Another part of Wal-Mart’s e-commerce strategy involves China. The company recently formed a new alliance with Chinese online retailer JD.com (Nasdaq symbol JD). Under the terms of the deal, JD.com acquired Yihaodian—Wal-Mart’s shopping website in China. In exchange, Wal-Mart will receive a 5% stake in JD.com. It has since increased that stake to 10.8%.
The company is also investing $50 million in New Dada, a Chinese online grocery retailer partnered with JD.com.
In August 2016, Wal-Mart agreed to acquire online e-commerce website Jet.com. This business sells a variety of products from over 2,400 retailers. The company will pay $3.0 billion in cash when it completes the purchase by the end of 2016. It will also pay Jet.com’s owners $300.0 million in Wal-Mart stock over the next few years.
Wal-Mart will continue to operate Jet.com as a separate business. However, that site’s expertise will help improve the performance of the company’s own web portals. Jet.com’s software to minimize shipment costs should also help Wal-Mart increase sales by keeping online prices low.
The company expects these moves will expand its e-commerce sales 20% to 30% a year by 2019.
Wal-Mart can easily afford these investments. On July 31, 2016, its long-term debt of $42.7 billion was a low 20% of its market cap. It held cash of $7.7 billion, or $2.48 a share.
As well, the company expects its cash flow will total $80 billion in the next three years. About $20 billion of that should go to share repurchases. The strong cash flow will also help Wal-Mart continue to raise its dividend, as it has for the last 43 years. Today’s rate of $2.00 a share yields 2.9%.
For fiscal 2017, the company still expects to earn between $4.15 and $4.35 a share. The stock trades at an attractive 16.5 times the midpoint of that range. Earnings in 2018 will likely be flat, but should rise about 5% in 2019.
Recommendation in Wall Street Stock Forecaster: BUY.
Wal-Mart has never let me down as a stock investment. I’m looking forward to how it does in 2017 now that it has improved its website. Thanks for the insights.
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Wal-Mart has never let me down as a stock investment. I’m looking forward to how it does in 2017 now that it has improved its website. Thanks for the insights.