Wal-Mart has been categorized as a struggling company over the last few months. Investors were disappointed in October to hear that EPS growth would be negative in fiscal year 2017 due to the investments in Wal-Mart’s associates and its e-commerce technology. Many analysts are also concerned with the decline in operating margins. However, Wal-Mart has an excellent track record of making investments that produce growth. In addition, there are many bright spots in the business.
One of Wal-Mart’s strongest points of growth in FY 2016 has been food. In Q3, food was the fastest growing category despite minimal inflation. The growth in food can be attributed to the success of Neighborhood Markets which delivered an 8% comp in Q3; their 19 consecutive quarter with positive comps. This year the company has began a grocery pickup service where customers can order from Sam’s Club’s or Neighborhood Markets and pickup their items without getting out of the car. Customers that use the online grocery pickup spend 50% more than similar customers that shop only in stores. I would anticipate this service to take some time to develop and become widely used but it is an exciting investment and an innovative idea that will generate future growth.
The company is looking to innovate and fight back against Amazon but it is also focused on customer experience in existing stores. Wages have been boosted and employees are receiving more training to enrich the customer experience. Research indicates that increasing wages actually increases sales while also cutting down on turnover which is costly to every company. Costco has historically had the lowest turnover in retail do to their favorable wages but expect Wal-Mart to close the gap.
As the company invests in growth and boosts its image by paying better wages it will begin to regain its competitive advantage. Wal-Mart announced last quarter that John Furner who did a spectacular job in China as the Chief Merchandising and Marketing Officer, will be returning to Sam’s Club as the Chief Merchandising Officer. This is a catalyst for the company going forward. Despite slow economic growth in China, Wal-Mart has done well and I think John Furner will make a difference in the Sam’s Club comps going forward.
The biggest investment for Wal-Mart over the next few years will be e-commerce. They will spend $1.1 billion in FY 2017 and $1.3 billion in FY 2018. It is expected that e-commerce will grow at 20%-30% a year which is in line with Amazons projected revenue growth over the same period. The company will upgrade its mobile app and invest in multiple online channels.
The stock was certainly punished in 2015 being down nearly 30%. The company has a trailing PE of 13.5 and a forward PE of 14.8 although I view the EPS guidance to be low considering the way it is investing along with the $20 billion worth of stock they will buy over the next two years. This buyback indicates that Wal-Mart will buyback about 10% of the company over the next two years.
In FY 2014, Wal-Mart earned over $5 per share. Current estimates expect Wal-Mart to earn just $5.30 in FY 2019 meaning expectations are set for the company to only see 6% growth over the five years while revenues are expected to grow 14% over the same period. With the $20 billion buyback, estimates could be closer to $5.50 for FY 2019 which I believe is conservative considering the company’s impressive historical ROI. With the buyback program, Wal-Mart could actually make less than it did in 2012, 2013, or 2014 and still make $5.50 in FY 2019. Over the last ten years the stock has traded with an average PE of 15. At $5.50 and an average PE, the stock could be near $83 representing about 24% upside. The stock also pays a nice 3.1% dividend. At $5.50 a share in FY 2019, investors could earn an annualized return of about 10% a year with lots of growth beyond FY 2019.