The nation’s largest retailer, Wal-Mart Stores Inc. (NYSE: WMT), reported earnings on Thursday. Let’s look at the numbers and see what they tell us not only about the company, but the economy from a macro perspective.
Wal-Mart earned $1.61 a share in the fourth quarter. Now, that beat estimates of $1.54 but represents a measly 1% increase year-over-year. Revenue came in light, if you can call $131 billion “light,” of analyst estimates. Same-store comparable sales, which is a critical metric in determining organic growth in a business, came in at 1.5%. For most retailers, this wouldn’t be much to get excited about. However, when you are talking about a company with 11,000 stores, 1.5% is pretty darn good.
This was also welcome news because Wal-Mart’s comps declined over the last six quarters. I’ll get back to the reasons why shortly, but the company had to be relieved by the 1.5% rise, as well as the 7% increase in its “Neighborhood Market” segment.
Wal-Mart’s e-commerce business is doing well, with sales up 22% during the year, and Sam’s Club saw a 2% comps increase.
Here’s where Wal-Mart is running into macro issues. It obviously relies on low- and middle-income earners. The good news is that there are plenty of them in America. With the Labor Force Participation Rate at a 30-year low, you have tons of unemployed and underemployed people looking for work and for great low prices. Why is that good news? Because of the way Wal-Mart is rent-seeking from the U.S. government. All those people who collect government payments, like unemployment and disability, are exactly Wal-Mart’s customers. Wal-Mart lobbies for government policies that continue this practice, and also lobbies for policies that will harm competitors. The company wanted an employer mandate for health insurance because it not only doesn’t have the same number of workers subject to that mandate because it hires so many part-timers, but smaller competitors would then have to shell out that money.
You can bet the reason why Wal-Mart raised its worker salaries to $9 per hour is because those same workers will turn right around and spend that money in the store!
The bad news is that the Obamacare mandate means people have to re-deploy money into buying required health insurance or pay a tax penalty. Some of that has been replaced by lower gas prices, which may be the reason the comps numbers finally rose.
The company is also facing currency challenges. A stronger U.S. dollar is hitting all companies doing business abroad and that resulted in $5 billion in revenue cuts last year.
For all of 2014, Wal-Mart earned $5.07 per share, up 3%, but expects earnings to fall within a range of $4.70 to $5.05 per share. Ugh.
Nevertheless, Wal-Mart generates a lot of cash flow and that’s how it not only can pay its dividend, but increase it. Wal-Mart remains a dividend aristocrat with another raise this year, marking 42 consecutive years with an increase. It’s only a 2% increase, although it has room for more. It punched out $16 billion in free cash flow last year, but the payout ratio is only 37%.
In closing, Wal-Mart is making lots of money, it just isn’t growing. For a company like that, I want to see a high dividend. Instead, I see only a 2.2% yield. That’s not enticing for a no-growth company trading at 17x earnings.
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