Think Long-Term for Walmart
January’s industry-wide retail same-store sales were reported today. There was a common theme in the report, as retail sales suffered industry-wide, discount retailer Walmart (WMT) gained yet again. Walmart had anticipated flat to +2% same-store sales, but the results were +2.1%. By comparison, the industry excluding Walmart suffered a same-store sales decline of 5.7%. The fact that Walmart has benefited during the recession from value-seeking consumers doing more grocery shopping at its stores is not a surprise to anyone that follows retail, but since we last posted about the company (Retail Staggers Into the New Year) its valuation has become far more attractive. At the beginning of the year, retailers were reeling from a horrendous holiday shopping season and even mighty Walmart’s shares were smacked down 7% for missing expectations, although sales were still up. That 7% decline contributed to a 17% decline for WMT year to date.
Walmart and discount retailers like it are perfectly positioned to become the one-stop shopping destination for bargain-conscious consumers. However, WMT was hovering near its 52-week low prior to Thursday’s trading; it makes you wonder what more can the company do? Walmart has consistently increased sales and earnings and surpassed the street’s estimates in each of the last four quarters. Furthermore, it would not surprise us to see this happen again when the company reports on Feb. 17th. It seems to us that the market is looking at Walmart with both a short-term and overly optimistic expectations. Walmart is suspending its monthly sales forecasts, which is common in today’s market considering the present economic uncertainty. This may help somewhat as WMT seems to rise and fall based on each month’s results.
When looking at the longer-term performance of Walmart, it is clear that this is a well run business that has shown consistently positive trends in sales, cash flow and earnings. Over the last seven years, revenues have grown by 12% annually and while that number has slowed to about 7.5% this year, for a mature business this results are nothing to scoff at. Similarly, Walmart is translating its increased sales into profits as earnings have grown about 13% per year during the past decade. Again, earnings growth this year is below that trend-line at only 8% but these are impressively consistent growth numbers for any company, much less the retail behemoth. Also, Walmart’s same-store sales are consistently tops in the industry.
This could be an opportunity for long-term investors to purchase a company with far better sales and earnings numbers than it had ten years ago but with a stock price that has only appreciated 14% during that time frame. One has to think that from an investment standpoint Walmart is fundamentally far more attractive than it was ten years ago. Near term, WMT has outperformed the market and its peers, but with the recent slide in price, it looks increasingly attractive using our methodology. So, in the short-term Walmart will continue to be the retail industry’s top performer, which should provide a solid floor for the stock but the key for investors remains its consistently impressive growth. With the company expanding overseas, it has far from saturated the foreign market and Latin America and Asia are key targets for Walmart’s planned expansion in the coming decade.
Ockham Research Staff @ February 5, 2009