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Wal-Mart Stores Inc. (WMT) is eyeing further stock growth in 2017 with its recent investments in the innovation of its digital services.
Wal-Mart is in the midst of investing $2 billion over a two year period into its digital operations allowing for a foundation of future growth. Money is also being poured into better employee wages, improved stock, and the creation of a cleaner and better experience in Wal-Mart stores. The grocery section has especially improved in Wal-Mart stores with higher quality goods and fully stocked shelves. Wal-Mart is mainly doing a better job in digital grocery shopping with pickup online orders soaring.
Wal-Mart is aggressively infiltrating the online market, as they recently announced its e-commerce shipping subscription will offer instant two day delivery and cut the price down to $49 per year, half the price of Amazon’s (AMZN) similar service. This subscription service provides free delivery for millions of Wal-Mart products which it hopes will lock in its customers into using its platform and driving sales growth. Wal-Mart is investing in 5 new e-commerce distribution centers expected to be opened within the year to handle increasing online orders. This, coupled with the retailer’s existing network of locations, is expected to give the retailer a credible shot at better competing with Amazon.
Retail consumers are no longer attracted to simple discounts. Amazon and other e-commerce businesses have made cheap and fast shipping an expected standard to be demanded in the modern market. Wal-Mart is investing an additional $2 billion specifically into increasing its logistical and technological capabilities to fit consumers’ demands. The retailer is constructing its own transportation fleet and partnering with regional delivery carriers to execute faster shipments. Wal-Mart will benefit from building and owning its own logistical system as it entails lower delivery expenses.
Wal-Mart is also tapping into the Chinese e-commerce space, in which Amazon has not bombarded. The company is vastly increasing its product offerings into China through the use of Global E-Buy, the international buying service which allows Chinese consumers to purchase American goods. Wal-Mart recently purchased full interest in its Chinese e-commerce retailer, Yihaodian. This online business is being utilized to directly compete with Chinese e-commerce giant, Alibaba (BABA) in the rapidly growing $672 billion dollar Chinese e-commerce market. Wal-Mart does not stop there; they plan to open 30 new stores and greatly expand distribution centers and logistical operations in the country.
Although expenses and spending are high at the moment, 2016 will be the peak year of company expenditures. Wal-Mart is spending $1.5 billion on wages this year, up $300 million from 2015. The rising wage expense mainly derives from investment in improving their e-commerce business. Wal-Mart is hiring the world’s top technological and logistical experts to revamp operations following slow online growth. Management is confident in its current state of capital expenditure. “We understand that dip in profits require patience from our investors, but we want to be very clear: these are the right investments for our future” said Wal-Mart CEO, Doug McMillon.
In recent customer surveys, responses have been very positive to the changes Wal-Mart is making to improve the customer experience. Online sales have allowed Wal-Mart to track regional trends and offer the most fitting inventory in its stores to cater to customers’ needs. The online pick-up order initiative has made shopping a quicker and hassle free experience. Wal-Mart has also began to establish its Walmart Pay service in stores, which speeds up purchases and limits checkout lines. Time constraints in stores are a major factor in the growth of the online marketplace and Wal-Mart is using these services to combat the trend. These changes have likely contributed to increased traffic in Wal-Mart stores for six consecutive quarters that follow a period of decline.
Positive Earnings Momentum
Wal-Mart’s first quarter earnings surprised everyone. U.S. same-store sales increased by 1%, beating consensus estimates of 0.5% growth. Without the impact of the strong U.S. dollar, the sales increase would have been 4%. The company has beat the Zacks consensus EPS estimates in each of the last three quarters, with its 4-quarter EPS surprise at +4%.
The positive earnings surprise and favorable management commentary has prompted analysts to raise their earnings expectations for the retail giant, with the Zacks Consensus EPS estimate for this year going up +2.9% over the last thirty days to $4.27, while next year’s estimates have gone up by +2.7% in the same time period. No doubt the stocks is currently rated Zacks Rank # 2 (Buy).
Wal-Mart stands to benefit from the uncertain threat of macro-economic slowdown. Discount retailing is one of few industries which thrive during downturns as they are able to lessen the quality and prices of their product line without tarnishing the brand and driving customers away. In the economic meltdown of 2008, Wal-Mart’s stock soared 21.6% due to increased earnings and strong demand which resulted from being one of few exceptional performers in the fiscal year. From 2007 to 2008, Wal-Mart revenues increased by 7.1% and increased another 7.7% in 2009. The increased market demand for low-cost goods attracted consumers to Wal-Mart, driving revenue growth. This straightforward trend will continue through the risky movements in the business cycle.
Wal-Mart Stock Outperforming Peers
Wal-Mart has continued to outperform its direct brick and mortar competitors, with its stock price increasing 15.87% year-to-date, while the discount retail industry as a whole has stayed flat. Target (TGT) stock suffered after its disappointing first quarter earnings report. Target has become too prone to losing market share throughout digital retail revolution which is likely linked to its lack of focus on food sales. While the sale of general merchandise is shifting online, groceries have been impacted on much smaller scale. 55% of Wal-Mart’s U.S. same store sales are sourced from groceries, as the retailer is the top U.S. grocer. Wal-Mart plans to expand this movement into its international locations. Meanwhile, Target has failed in its efforts to expand internationally with its recent pullback from Canada. Domestic retail expansion opportunities are becoming scarce and as a result, Target’s lack of global presence is further prohibiting them from competing with Wal-Mart. While Costco (COST) better competes with Wal-Mart food-wise and internationally, their stock has plummeted 8% year-to-date. With an annual membership fee, Costco caters to higher income households. The declining demand from these wealthier households, combined with falling gas prices has deteriorated Costco’s sales. In comparison, Wal-Mart is unaffected by macro patterns.
The movement towards digitizing will be a major catalyst in Wal-Mart’s growth moving forward. Wal-Mart is now finally adapting to the modern consumer which will aid in increasing sales and winning back customers lost to Amazon and other digital services. Its profits have dropped due to major investments in improving the customer experience, but the capital expenditure is paying off with increased revenues and overall in-store and online traffic. Management is headed in the right direction by investing money in the correct areas with its major technological and logistical investments, as it is allowing them make up for slow e-commerce growth and get closer to Amazon. Strong financials, EPS estimate upgrades, and reaching the peak of company spending reiterate Wal-Mart stock will continue to trend upwards in 2017.
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