Is it worth betting on Walmart (NYSE:WMT), the world’s largest retailer? The company is drastically reorganizing its operations as it struggles to remain on top. Investors will get some perspective when the company reports first quarter 2018 earnings before the market opens tomorrow, Thursday.
After Walmart reported Q4 2017 results in February, its stock plunged more than 10% on signs e-commerce growth had peaked for the multinational retail giant. That online growth, which is so crucial for this behemoth's survival, dropped 24% on the heels of an additional 50% for the previous period.
Keep an eye on Walmart's e-commerce number. We believe it's become the single most important metric for Walmart as its intensifying battle with online rival Amazon (NASDAQ:AMZN) continues. Walmart’s recent moves suggest the Bentonville, Arkansas-based retailer is all-in to win this war.
In its biggest-ever deal, announced last week, Walmart bought a controlling stake in India’s largest online seller Flipkart Group for $16 billion. That follows its acquisition of e-commerce startup Jet.com two years ago.
In another move announced in late April, Walmart said it’s ceding control of British supermarket retailer Asda to the UK's second largest supermarket chain, J Sainsbury (OTC:JSAIY), in a deal worth about 7.3 billion pounds ($10 billion). Walmart will retain a 42% stake in the combined company, and will take a noncash loss of about $2 billion on the transaction, according to a statement.
This international push comes at a time when Walmart’s earlier efforts and investments as well as price cuts, all made to shore up its online sales, have started to hit the bottom line. In the last quarter, the retailer’s operating margin dropped to 3.3%, a record low level for the company, raising doubts about future profitability and its stock valuation.
On its home turf in the U.S., one of the biggest challenges for Chief Executive Officer Doug McMillon is about positioning Walmart as a millennial shopping destination—one that's as good as Amazon. But reaching that goal doesn’t look like it will be easy. Younger shoppers have gotten so used to the Amazon platform and simply don’t associate this bricks-and-mortar giant with online retail.
Amid all this uncertainty Walmart stock is under pressure. It's fallen 14% so far this year and it seems a turnaround may take much longer than some analysts believe—especially when Walmart is still figuring out its online strategy.
For the first quarter, Walmart is expected to report earnings of $1.12 per share, up from $1.00 last year, and sales of $120.49 billion, an increase of 2.5% up from $117.54 billion it reported last year for the same period, according to FactSet consensus.
There is no doubt that Walmart has a lot of work to do to expand its e-commerce customer base. Nevertheless, we still believe shares of this mega-retailer, which yesterday closed at $84.52, are a great value for long-term investors who want to earn growing dividend income and are willing to keep this defensive stock in their portfolio.
Despite challenges on the e-commerce front, the retailer is still bringing in more customers to its stores than any other franchise. Its comparable store sales, known as “comps,” registered 2.6% growth at its U.S. stores during Q4, exceeding Street expectations, following a very strong Q3 that saw the best growth on this measure in eight years.
As we wrote in February, this bearish spell for Walmart stock hasn’t yet run its course. There could, in fact, be more weakness going forward.
That said, we might see a strong rebound if the company’s e-commerce sales resume their upward journey and hit the 40% growth mark as management is forecasting. We don’t think investors should lose their patience with Walmart just yet.
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