The fall in gas prices hasn’t resulted in a spike in retail spending as anticipated, and the shift to natural and local-sourced goods is leading to a paradigm shift for retailers.
Yet, you can’t overlook size when investing in a shifting industry. Wal-Mart (NYSE: WMT) is the largest retailer in North America, with a strong presence globally. It’s not a company that can be put out of business in a few months.
However, investors have been shunning this retail stock, as sales growth continues to be unimpressive. Wal-Mart has long been known as the low cost leader, squeezing suppliers for the lowest cost and in turn offering its products cheaper than other retailers.
At some point the hyper-focus on cost cutting can diminish the shopping experience. This has happened to some degree at Wal-Mart. But it appears that the company has realized this to some extent, hence the recent announcement that it’s raising its minimum wage to $9 an hour.
There are two ways to look at the wage hike. One, that it’s a positive that will attract higher quality employees; and two, that it will increase company costs.
My colleague Stephen Mauzy makes the point that higher wages should lead to more productive workers. I tend to agree with him that the good will outweigh the bad here. Higher wages also means more money in shoppers’ pockets, and with well over 2 million employees, many of Wal-Mart’s workers are also likely customers.
Shares of the retail stock are up just 45% over the last five years, while the S&P 500 is up 74%. Wal-Mart is overlooked by most of the market because it’s been a gross underperformer over the last couple of years. But will a shift toward higher wages instill confidence in this giant retailer?
Well, if Costco (NASDAQ: COST) is any indication, it could be the start of something good for Wal-Mart. One of the keys for Costco has always been its fairness to employees in paying them an above-average wage. And with that, Costco shares are up 150% over the last five years and have outperformed Wal-Mart shares by 150 percentage points over the last 15 years. Note that Wal-Mart owns Costco’s largest competitor, Sam’s Club.
Let us not forget Wal-Mart’s dividend, however, which it has managed to increase for 40 straight years. Its 2.4% dividend yield is one of the best among major multinational retailers. And it’s paying out less than 40% of its earnings via dividends.
Then there’s the fact that Wal-Mart is trading at a price/earnings ratio of 16, which makes it the cheapest of the discount retailers, compared to the likes of Target (NYSE: TGT), Costco and Dollar General (NYSE: DG).
The New Wal-Mart
Wal-Mart held an investor conference earlier this month. It provided insight into the fact that the company is still trying to recover from past hiccups in investing in its operations. Along those lines, we could be in the early innings of a turnaround in its U.S. operations – which includes not just investing in labor, but also improving logistics and reworking manager positions that cover store floors.
Its core customers should also continue to benefit from lower gas prices and an improving employment picture. But there’s also the rollout of its smaller store formats and greater focus on e-commerce that should help keep Wal-Mart relevant.
It’s never easy to turn around a ship as large as Wal-Mart, but it starts with charting a course. Better in-store service should ultimately go a long way in attracting and retaining customers. That, along with an ironclad dividend, should translate into more interest from investors.
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