Is retail giant Wal-Mart Stores, Inc. (NYSE:WMT) truly a bellwether of the health of the U.S. economy? The world’s largest retailer recently blamed a cold spring season, the payroll tax hike, delayed tax refunds and moderate food inflation for its recent top and bottom line miss during its first quarter earnings.
Yet the market recently contradicted Wal-Mart Stores, Inc. (NYSE:WMT), as consumer confidence rose to its highest level in nearly six years, with the benchmark Consumer Sentiment Index rising to 83.7 in May. Declining fuel prices, stronger job growth, and positive retail sales in April have strengthened the U.S. economy considerably, which led some investors to rightfully question if Wal-Mart’s problems are related to larger macro problems or its own operational inefficiencies.
A first quarter fumble
For its first quarter, Wal-Mart Stores, Inc. (NYSE:WMT) earned $1.14 per share, or $3.78 billion, up from the $1.09 per share, or $3.74 billion, it earned in the prior year quarter. Analysts, however, had expected $1.15 per share. Meanwhile, revenue rose an anemic 1% to $114.19 billion, also missing the consensus estimate of $116.29 billion.
Same-store sales (excluding fuel) in the United States declined 1.4% while total store visits slumped 1.8%, missing the company’s own forecast for flat to positive 2% same-store sales growth. This was the first time in six quarters that Wal-Mart Stores, Inc. (NYSE:WMT) reported negative same-store sales growth. International sales rose 2.9%, but Wal-Mart CEO Mike Duke stated that he was “disappointed” in the lack of expense controls in its smaller global segment.
The same old blame game
Wal-Mart Stores, Inc. (NYSE:WMT) specifically noted that sales of warm-weather products, such as outdoor furniture, sporting goods and spring clothes, declined in March and April. Wal-Mart’s primary competitor, Target Corporation (NYSE:TGT), also recently warned that April same-store sales would come in flat, for the same reasons. Target also expects its first quarter earnings to miss the low end of its previous guidance of $1.10 to $1.20 per share. Target Corporation (NYSE:TGT) reports its first quarter earnings on May 22, and should give investors a better yardstick by which to measure Wal-Mart Stores, Inc. (NYSE:WMT)’s numbers.
Meanwhile, Kohl’s Corporation (NYSE:KSS) also recently stated that an unusually cold spring season had hurt its sales over the past two months. In its recently released first quarter earnings, Kohl’s stated that same-store sales declined 1.9%, primarily attributed to an 8% plunge in warm-weather merchandise such as T-shirts, shorts and sandals. Although Kohl’s Corporation (NYSE:KSS) first quarter revenue slid 1%, its e-commerce sales surged 31%. By comparison, Wal-Mart’s e-commerce sales rose 30%.
E-commerce growth
Wal-Mart, Kohl’s, Target and other brick-and-mortar retailers have been working hard to boost their e-commerce initiatives, and they have been (very) slowly creeping up on Amazon.com, Inc. (NASDAQ:AMZN).
Last quarter, Amazon.com, Inc. (NASDAQ:AMZN) only reported 22% e-commerce growth, which disappointed analysts. However, Wal-Mart only projects $9 billion of e-commerce revenue for the current year (less than 2% of its top line) while Amazon generated $61 billion in online sales last year. This following chart shows exactly why Wal-Mart and its industry peers are valuing e-commerce growth so highly.
To catch up to the competition, Wal-Mart has invested heavily in tech companies to build its online initiative, @WalMartLabs. The company recently acquired cloud computing company OneOps and social-media e-commerce startup Tasty Labs to aggressively expand its reach onto mobile devices. In other words, Wal-Mart is no longer content to play defense against Amazon, it’s aiming to give Amazon a taste of its own medicine.
Bills, bills, bills
Expanding its e-commerce initiatives hasn’t come cheap for Wal-Mart. Unfortunately, Wal-Mart still has another big bill to pay over its bribery allegations in Mexico.
Last year, Wal-Mart was taken down by a flurry of bad publicity after The New York Times reported that Wal-Mart de Mexico had repeatedly bribed government officials to expedite its expansion into the country. To fend off possible government intervention, Wal-Mart spent heavily to start an inquiry into its own practices and possible violations of the Foreign Corrupt Practices Act.
The combination of aggressive e-commerce initiatives and its own internal bribery reviews caused Wal-Mart’s first quarter expenses to surge 44.4% year-on-year, or $200 million. Yet from this following chart, we can see that Wal-Mart’s higher expenses, which barely outpace revenue growth, are merely a continuation of a longer-term trend.
A history of bad PR moves
Wal-Mart’s flat growth and rising expenses are nothing to worry about, especially when it regularly generates over $100 billion in quarterly revenues with an operating cash flow of over $25 billion. Yet over the past few years, Wal-Mart’s repeated PR gaffes have damaged the company’s image and credibility more than its slow top and bottom line growth.
In 2011, The Huffington Post exposed Wal-Mart’s dependence on U.S. prison labor. In 2012, the company became ensnared in bribery allegations in Mexico. Then earlier this year, the company allowed panicked internal emails and meeting minutes to be leaked onto the Internet, in which executives posed confidence-shaking questions such as “Where are all the customers? And where’s their money?”
It’s obvious that Wal-Mart needs some positive PR for a change. Last month, a building collapse in Bangladesh killed more than 1,000 workers. This prompted a joint effort from international retailers to invest in significant safety improvements for their facilities. While this would have been a good opportunity for Wal-Mart to join hands with H&M and PVH Corp (NYSE:PVH) (Calvin Klein, Tommy Hilfiger) to garner some positive publicity, Wal-Mart stated that it would conduct its own independent review of its 279 Bangladeshi factories, instead of joining the safety accord.
I believe that Wal-Mart’s lack of PR control indicates that it simply doesn’t have any wiggle room in its profit margins to spare. In other words, it can no longer afford (or simply no longer cares) to play nice with its rivals.
The Foolish Fundamentals
In closing, let’s compare Wal-Mart’s key fundamentals to its primary industry peers.
Source: Yahoo Finance, May 18
Wal-Mart is a fundamentally sound stock, but the question is not if Wal-Mart will fail, but whether if it can succeed. At times, it feels like Wal-Mart’s size is one of its biggest problems. Some larger companies such as Kraft Foods Group Inc (NASDAQ:KRFT), PepsiCo, Inc. (NYSE:PEP), Safeway Inc. (NYSE:SWY) or Philip Morris International Inc. (NYSE:PM) were able to achieve higher profitability by spinning off their contradicting businesses.
Therefore, it may be time for Wal-Mart to consider spinning off its Sam’s Club wholesale business, its international stores, and its e-commerce segment into three separate businesses. These three segments could evolve into different businesses that would attract fresh investor capital.
For now, I believe Wal-Mart is a robust, dependable holding that should post better top and bottom line growth in the second half of the year, after all these weather and PR-related troubles are behind it. Therefore, sunnier days could still be ahead.
The article Is it Time to Buy Wal-Mart? originally appeared on Fool.com and is written by Leo Sun.
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