Tuesday we saw the latest earnings report from retail giant Wal-Mart (NYSE: WMT) and the news was not good. The company missed earnings per share forecasts. To make matters worse, it lowered its forward guidance.
The stock fell more than 3% during Tuesday’s trading session, erasing more than $1.5 billion in market value. Frankly, I’m a bit surprised the stock didn’t fall more than it did – although it tells me that the market was already expecting a lackluster report from the company.
Before we dive into the implications of the Wal-Mart earnings report, let’s take a look at the actual results.
Wal-Mart reported earnings of $1.08 per share, missing analyst expectations of $1.12 per share and sliding well behind the $1.26 per share that the company earned in the same quarter of last year.
The company generated $120.2 billion in revenue during the quarter, essentially flat compared to the $120.1 billion generated in the same quarter of last year, but beating the analyst forecast that it would generate $119.7 billion in revenue. But considering that foot traffic increased 1.3% and same-store sales rose by 1.5%, it’s surprising that the revenue figure came in so low.
Wal-Mart also lowered its full-year earnings guidance to a range of $4.40-$4.70 from its previous range of $4.70-$5.05.
It’s important to remember that the retailer has faced a lot of social pressure during the past few years over its low wages. In February, Wal-Mart announced that it would be raising its starting wage to $9 per hour and would move toward a company-wide minimum wage of $10 per hour sometime in 2016.
Wal-Mart’s chief financial officer, Charles Holley Jr., specifically called out the wage increases and other investments as part of the reason the company’s profits are under pressure. He also pointed to shrink – aka theft – and weak results in the pharmacy division.
There are a couple of ways to look at the situation.
On the one hand, the 2012 Mexican bribery scandal was a great time to buy Wal-Mart. I picked up a few shares at that time, thinking that if any company could bounce back from that sort of scandal then Wal-Mart could.
On the other hand, the stock has lagged the S&P 500 index on a one-, five- and 10-year basis, even when you factor in its outsized dividend.
With the company spending hundreds of millions on additional wages, store upgrades and e-commerce infrastructure, one could certainly reason that Wal-Mart’s investments will start to pay off eventually and unsuspecting financial markets may soon be taken by surprise.
The stock is certainly priced at a discount. Wal-Mart currently trades at a price-earnings ratio of roughly 14.4, while the S&P 500 trades at a P/E of roughly 21.
The question is whether Wal-Mart stock’s discount pricing is an opportunity for contrarian investors or a sign to steer clear.
I’m inclined to think that the stories of Wal-Mart and McDonald’s (NYSE: MCD) are pretty similar. Both companies grew rapidly throughout the 1990s and early 2000s and have since fallen out of social favor.
McDonald’s has also fallen out of favor with investors. Shares of the fast-food giant, which have only risen 15.5% over the past four years, have significantly lagged the S&P 500, which has risen more than 75% during the same period.
Meanwhile, Wal-Mart appears to be heading down that same path.
The stock is down 8% over the past year, 7% over the past two years and 4% over the past three years. You have to go back an additional year to find a positive return for investors.
With its resources and experience, I fully expect there to again be a time to buy into Wal-Mart. But is now that time? After this latest weak Wal-Mart earnings report, I’m not convinced.
DISCLOSURE: Jay Taylor personally owns shares of Wal-Mart (NYSE: WMT).
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