this was originally published Aug 14 2014
Wal-Mart (WMT) must have been chanting “Break the Streak” during the second quarter, and it worked.
After five quarters of negative same-store sales, the discounter finally achieved sales guidance and put up a flat comparison. Note that this was following five quarters of missing comp estimates of flat to positive, so the bar was set pretty low. Also, it did not hurt that the former head of the U.S. division gave the nod on CNBC mid-quarter that employment gains were simply not showing up at mammoth discount stores.
Wal-Mart cutting its full-year earnings guidance to $4.90 to $5.15 per share from $5.10 to $5.45 was met with zero surprise. Consensus was already at the high end of the new range and, let’s face facts, it is about time Wal-Mart cleared the guidance decks and took a gulp of reality Kool-Aid. There was a reason I listed Wal-Mart’s 2014 guidance at the beginning of the year as “LOL guidance.” So I take a clearing of the decks as a slice of good news in this discounter’s retail funk.
While Wal-Mart sales did not miss this quarter, it is hardly a reason to get excited about the stock. Don’t forget traffic is still sliding at a loss of 110 basis points this quarter. And while that is a heck of a lot better than Kohl’s (KSS) 330 bps decline, I wouldn’t own that stock either.
Here is the problem: Wal-Mart is way behind in ecommerce investing, and while catch-up spending is necessary, the bottom line is going to hurt for some time. There are other cost pressures, including price investments in the face of food inflation, SNAP (food stamp) cuts that hurt to the tune of 70 bps this quarter and, oh yes, the need to invest in labor to improve customer service. Throw in some complaining about health care costs and add flat revenues for the foreseeable future and I am looking elsewhere for returns in the retail space.
Kudos to Wal-Mart for finally seeing the light and investing in smaller formats, as well as taking the hit on ecommerce spending. While those decisions may pay dividends in the long term, I see better short-term opportunities.