Wal-Mart’s Plan
Wal-Mart’s management believes it cut costs too hard in the United States – which has resulted in unmotivated employees and a less-than-stellar reputation.
The company’s plan is to grow revenue through improving customer experience. This includes:
- Better motivated employees
- Online and in-store seamless experience
These two experience improvements are costly, and will reduce margins. They also set Wal-Mart up for another long run of growth.
Customer experience scores are already improving, as the image below shows:
Source: Wal-Mart 22nd Annual Meeting Presentation, slide 4
Digital sales are growing rapidly for Wal-Mart. The company is expecting digital growth of between 20% and 30% a year.
The company’s digital operations are currently unprofitable, and are projected to be unprofitable through 2019. But, operating losses from digital are expected to be their worst this fiscal year for Wal-Mart (the company’s fiscal 2016 ends in January of 2016). The image below graphically emphasizes this:
Source: Wal-Mart 22nd Annual Meeting, Neil Ashe Presentation
Wal-Mart is taking on unprofitable operations (for now) to grow the business into the future. The company’s goal is to provide a seamless shopping experience from online to in-store.
Future Total Returns
The company is expecting revenue growth of between $45 and $60 billionover the next three years; revenue growth of between 3% and 4% a year.
In addition, Wal-Mart Stores, Inc. (NYSE:WMT) plans to repurchase $20 billion in shares over the next 2 years. This is about 10% of the company’s market cap at current price. Share repurchases should normalize at around 2% to 3% of shares outstanding a year over the long run.
Additionally, Wal-Mart currently has a 3.3% dividend yield. The company’s revenue growth, share repurchases, and dividend combine to give investors expected total returns of about 8% to 10% a year over the long run.
The company’s margins are expected to fall this year and next year. After that, margins should improve as digital sales reach better economies of scale. This could well add to long-term expected total returns.
Wal-Mart is also deeply undervalued at current prices. The company is trading for a price-to-earnings ratio of just 12.6 at current prices. Investors who initiate or add to a position now will likely see additional gains as the company’s valuation multiple rises over the next several years.
Final Thoughts
Wal-Mart is transitioning to grow its business. Investors who have been following the stock know this. The large recent sell off presents an excellent opportunity for long-term investors to initiate or add to a position in Wal-Mart – the largest and most dominant retailer in the world.
Wal-Mart has historically been very recession resistant. The company’s enormous size gives it a durable scale based competitive advantage. Additionally, the company is shareholder friendly. The stock also has low volatility (excluding the recent steep decline). Finally, Wal-Mart has solid long-term total return expectations. The company is a buy and ranks highly using The 8 Rules of Dividend Investing.
All businesses go through trouble at some point or another. Wal-Mart’s announcement of lower earnings next fiscal year does not in any way mean the business is failing. Over the long run, Wal-Mart will likely generate solid risk-adjusted returns. The recent price decline makes now an even better time to go long Wal-Mart.
Disclosure: None
