Wal-Mart looked almost doomed at the start of the year. The most recent quarter posted positive numbers that have many investors wondering if the retail giant is poised for another 10 years of dominance. If you take a closer look at the recent numbers and paint them into the greater context of Wal-Mart’s story, you can see just how much you should or shouldn’t be investing over the next few years.
Last Quarter
Last quarter was a bright spot after several dismal reports in a row. The earnings hit $1.07 a share, which is a nice surprise when the estimates were for $1.05. They also saw a 52-week high during the last quarter, which shows some good signs of life over an underwhelming 2015.
All of this stems from a revenue report that was over expectations. In fact, it was all enough good news that Wal-Mart improved their end-of-year expectations.
Now, if you’re looking closely at these numbers, you’ll see that they are unmistakably positive, but they are also far from impressive. The short story is that Wal-Mart has reinvested in the domestic market, and the dividends are starting to appear. This alone isn’t enough to make a good forecast for the next several years.
Bear Market Success
Under the former CEO, Wal-Mart was entirely focused on bringing costs and prices as low as possible. In the previous bear market, it rocketed the company to the top of American business.
The last two years have seen the slow, gradual turn, and the U.S. is now more bull than bear. With the extra domestic spending, bottom-line prices are no longer compelling enough to sustain the company’s motto. Consumers are starting to be able to afford to purchase according to their conscience, and Wal-Mart has taken a huge beating in public opinion over the last five years.
International Business
This has been the big story. Wal-Mart was one of the first to invest heavily in China, and they turned to international markets heavily when the U.S. economy tanked in 2008. The results were a huge bull run in the face of a struggling America.
Now, the scenario has flipped. China is no longer the promised land, Brazil and many other Latin American markets are underperforming and the EU is facing its biggest crisis since its inception. With so much international turmoil, Wal-Mart has had to rethink the strategy that netted them so much profit over the last decade.
The good news is that they seemed to recognize the situation very quickly, and already an improved American market is picking up the international slack. More than anything else, this suggests that Wal-Mart will remain profitable for some time.
Important Changes
The biggest reason Wal-Mart has seen such a quick turnaround is with companywide changes. They recognized their problem areas and made the upper management changes necessary. Company-wide wage increases have paired with a renewed interest in the customer experience, and U.S. shoppers have been returning.
If you think about your own Wal-Mart experience, there’s a good chance checkout is less of a problem than it used to be and the shelves are better stocked than they were a year or two ago. The major changes have hit the store, and the company has been able to expand more domestically than in the past decade.
Finding the Ceiling
Overall the changes look to be positive for Wal-Mart, but a bit of discretion is necessary. The company has responded to adversity and maintained a profitable position, but their long-term future is very different today than it was even three years ago.
The recent change in direction shows that upper management is fully aware of how limited the potential for international expansion is going to be for the next few years. The shift to smaller, local grocery stores maintains revenue, but it presents a much smaller profit potential.
There’s only so much U.S. territory left for Wal-Mart to claim, so until overseas markets stabilize, the company is looking at an inevitable soft ceiling, and they’re approaching it quickly.
Putting it All Together
Should you invest in Wal-Mart? The simple answer is two-fold. If you already own a stake, keep it. You can anticipate a minimum of a few more years of profits, and things could potentially improve for the company down the line.
If you aren’t already invested, there are a number of competitors with a much brighter outlook for the next five years. Amazon and a diversified stake in smaller, niche retailers have a much higher potential.
Regards,
Ethan Warrick
Editor
Wealth Authority
