Sun fails to come up. Water no longer wet.
Wal-Mart (WMT) sales dropped at its U.S. stores for the quarter ended on January 31 2010.
Wal-Mart comparable sales dropped? That’s the first time ever. Ever.
Time to add this company to my watch list for a buy sometime within the next three months.
If you’re looking for thin reeds (See my post https://jubakpicks.com/2010/02/18/my-thin-reeds-say-the-first-half-of-2010-will-be-surprisingly-strong-in-the-u-s/ ), here’s another one that says U.S. consumers are feeling better about themselves. Some portion of the consumers who found shopping at Wal-Mart so attractive during the worst of the recession has apparently decided that it’s okay to spend a little more.
We’re not talking about a huge drop here. U.S. comparable store sales were down all of 2% from the year-earlier quarter. Some of that drop came from falling prices for electronics and food, the company said. Wall Street analysts say that accounted for about 0.9 percentage points of the drop. But much of the rest came from a drop in traffic caused by first, remodeling at stores that deterred shoppers, and second, a decline in store traffic.
Some of the consumers who had gone to Wal-Mart, often for the first time, during the recession are moving to back to their former shopping habits. For example, this was the first quarter since the start of the recession in which Target (TGT) showed higher same store sales growth than Wal-Mart.
This quarter and the next are also tough on Wal-Mart because the year-earlier quarters were so strong. In the fourth quarter that ended in January 2009, for example, comparable store sales in the U.S. climbed 3.6%. In the next quarter the year-to-year challenge is almost as bad since the company turned in 2.9% year-to-year same store sales growth in 2009.
So why am I adding this stock to my buy list?
Because sometimes it takes a middling quarter to show exactly how great a company is.
For an example, look at what Wal-Mart managed to achieve on margins during this “bad” quarter. Gross margins climbed by 0.35 percentage points on tighter inventory controls. Operating margins rose 0.4 percentage points on higher gross margins and selling, general, and administrative expenses (SG&A) that climbed at a lower rate than sales. It didn’t hurt either than while U.S. comparable store sales were flat, sales in the international business were up 19.5% year-to-year including currency effects of 11.9% excluding currency. International sales carry higher margins than Wal-Mart gets from its more mature U.S. business. (Because Wal-Mart has been such an aggressive acquirer internationally, international comparable store sales growth isn’t a very useful number so I’m using just net sales growth for that part of Wal-Mart’s business.)
Not supposed to happen like that. Margins are supposed to fall and SG&A as a percentage of sales to climb when sales struggle.
And because if the economy slows in the second half of 2010 and into 2011, Wal-Mart is the kind of stock I’d like to own. (I also don’t mind that in the just-reported quarter comparable store sales grew by 5.6% in Brazil and 4.8% in China.)
I’d expect that investors will take a few dollars more out of Wal-Mart’s share price over the next few months as they focus on those tough year-to-year comparable sales numbers and the shift in consumer behavior. The shares already trade at just 13.4 times projected fiscal 2010 earnings. The ten-year average price-to-earnings ratio on fiscal year sales is 20. At the February 19 share price the stock paid a 2% dividend.
Check the watch list over the next couple of months to see whether these shares get to be an even bigger bargain.
Full disclosure: I don’t own shares of any stock mentioned in this post.
Viwi, Sorry I’ve been slow to re-post. I don’t think that a 16 PE is excessive for a company like Walmart, it seems about right. There is more to value in this company than the current earnings. They are sitting on $7b and growing in cash. Plus the Earnings per share increases every year rain or shine. For such a large company this is an impressive achievement. My favorite aspect of this stock is the dividend. While the yield is only 2.04% they have increased it rapidly every year for 35 years (14.74 % increase this year). The over $13 billion in free cash flow to continue increasing the dividend for a long time. This stock allows me to sleep well at night. Clearly Walmart has a bad reputation with many people, but ALL consumers are aware that Walmart is the low price leader on virtually everything. Viwi, are you disgusted with the stock or just the company in general? Clearly this isn’t going to be a homerun, but I think there are some safe gains to make here.
I’m struggling more and more with what increasingly appears to be a two-tier national economy, something our composite economic indicators are not designed to model. Example: on the one hand real (not headline) unemployment inches higher, on the other median home prices inch higher. Huh? Are deep pockets swooping in to buy foreclosures for tax-sheltered rental properties? Home mortgage delinquencies are increasing, commercial mortgage delinquencies increasing, bank failures are increasing, credit card default rate is increasing, new auto sales are dismal, etc., etc.,yet our economic leaders tout a recovery, albeit slow. Are our economic prognosticators simply “whistling past the graveyard”? Uncertain investing environment.
In this kind of yo-yo market, WMT can easily go down to 50 and then go back up to 60. If you we catch it at 50, what is bad about 20%? And you will get 2.2% to wait…
This seems like an absurd argument if you look at the overall economy. One could analyze this multiple ways and come up with differnent conclusions, but to me this feels more like a lack of consumer confience than anything else.
javos, Good post.
The combination of Walmart focusing more on grocery as well as project impact appears to be a strategy to attract shoppers with a higher discretionary income than the traditional stereotypical walmart shopper. Is it working? Time will tell. In the current economic climate I believe the dollar stores have indeed benefited at walmarts expense.
I’m with you javos, I think consumer’s are looking for even cheaper places than Walmart.
If is difficult, if not impossible, to translate same-store-sales of any specific name into any a meaningful read on the larger economy. Did Wal-mart sales drop because of increased consumer confidence (i.e. moving “up” to Target”), decreased consumer confidence (i.e. moving “down” to Dollar Tree), or simply spending less overall. The most reliable indicator of consumer sales is to watch reported sales tax revenues (enforced vigorously by cash-strapped state and local governments). Does anyone see “light” there? I’d like to hear about it if you do. Further, the outlook is uninspiring, given the unemployment data vs. consumer debt burden.
bsdgv I think the rise in numbers from Whole Foods and other chains shows that it was because less things were sold. I you think back a year ago the market was freefalling and we thought the banks may collapse. People were all going to Walmart which drove up their sales numbers. Now traffic is still high just not to the panic levels.
Direction is hard to read so I am adding big positions in Dividend stocks and turning that up to be about 35% of portfolio as things look rocky
> Some of the consumers who had gone to Wal-Mart, often for the first time, during the recession are moving to back to their former shopping habits.
Is that so? The revenue at WMT fell because less things were sold or because the price of things fell?
Still Deflating
http://www.ritholtz.com/blog/2010/02/still-deflating/
Do you know why the rich must be taxed and MUST BE TAXED BIG TIME? Read on…
“Here is something to think about: Even after the TARP has been fully paid back, the US Government is STILL bailing out TBTF banks more than we are giving bailouts to US families with hungry kids, and more than all of our overseas aid . . .”
http://www.ritholtz.com/blog/2010/02/how-much-are-we-subsizidizing-banks-beyond-tarp/
Shamelessness galore. And their attorneys are everywhere… Even in this group.
Steal from the rich as tax. Give it to the poor.
-bloodsuckingdogoodervampire
Jim,
You have the SLB smith deal that was rumored…. Long term this put SLB in a better position?
Mike: I do not understand how WMT at P/E of 16 can be undervalued. Their profit margin is tiny, and the only thing that they know is how to sell cheap things by buying it even cheaper. Company has a bad reputation for customer service and for treating their own workers.
Now, tell me something good about Wall-Mart and its stock.
I like the idea of Walmart on the watch list. Like viwi said it hasn’t moved up since 1999. Since 1999 it has over a Trillion dollars in net income. Total equity has nearly tripled. With the 2% dividend you would have expected more of an increase in share price. WMT was overvalued in 1999, but it is undervalued now. The market’s weighing machine will catch up with WMT eventually. It is a money making machine.
Buying Walmart? or even adding it to a watch list? I do not get it. This stock did not move up from September 1999. Sure it pays dividend, but it is only 2%. What is the point? This stock will not go down 50% (beta for this stock is one of the smallest).
Jim, are you saying that we should be happy with 5-6% return for the next years to come?
Today I had to log in to view the entire article or to view comments. Previously, log-in was only required for posting comments. Is this a new policy, or a glitch? (Hey, even the Financial Times lets me read 5 articles before I have to log in!)
Hi Jim,
When you have some time, I was wondering what you thought of the recent mxwl earnings report. I like the YOY sales growth and the reduction in operation expenses. The stock was on a steady slide this week. Are you still bullish? BTW, I finally got your book. I couldn’t find it in Australia, so I bought it on Amazon. Looking forward to it on tomorrows flight. Best wishes, Student
“Stocks Face ‘Ice Age’ Drop as Indicators Peak: Chart of the Day”
http://www.bloomberg.com/apps/news?pid=20601109&sid=a2jpN6o183ZQ&pos=15