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Can Wal-Mart's (WMT) Expansion Strategies Attract Investors?

Zacks Equity Research

Wal-Mart Stores Inc. WMT attended the Bank of America Merrill Lynch 2017 Consumer & Retail Technology Conference on Mar 14.

Per sources, analysts of Bank of America and Merrill Lynch expect the company's valuation to improve with time. Despite having a Zacks Rank #4 (Sell), Wal-Mart carries a VGM score of ‘A,’ and a Value and Growth score of ‘A.’ This indicates that there is substantial potential in the stock.

The analysts foresee much upside on the stock owing to the optimism seen in the recently reported fourth-quarter fiscal 2017 results. This can be attributed to the company’s strong same-store sales and growing e-commerce business.

Higher Comps

Wal-Mart reported higher comparable store sales (comps) in fourth-quarter fiscal 2017, wherein earnings and revenues exceeded the Zacks Consensus Estimate. The company’s Wal-Mart U.S. same-store sales beat estimates by 1.8% amid a challenging environment that saw many retailers report negative same-store sales.

This was the 10th consecutive quarter of positive comps which were well above the company’s expectations of 1−1.5% growth. While comp traffic improved 1.4%, average ticket inched up 0.4% in the quarter. The impact of rising consumer spending was seen in the growth in traffic during the quarter. The company also witnessed low-single-digit comps in grocery despite a 90-basis point impact from food deflation. e-commerce sales drove Wal-Mart U.S. comp sales by 0.40%.

Wal-Mart Stores, Inc. Price, Consensus and EPS Surprise


Wal-Mart Stores, Inc. Price, Consensus and EPS Surprise | Wal-Mart Stores, Inc. Quote

All these factors have encouraged Merrill Lynch analysts to believe that Wal-Mart’s core U.S. strategy will continue to do the trick in fiscal 2018.

Investments in e-Commerce Business

Wal-Mart is making huge investments in e-commerce to compete better with brick-and-mortar rivals as well as Amazon.com Inc. AMZN. These efforts are also aimed at growing the company’s hold in the online business.

In this regard, Wal-Mart is executing acquisitions that provide access to more upscale customers and new technologies. After the buyout of the U.S. e-commerce company, Jet.com, Inc. in Sep 2016, Wal-Mart is aiming to acquire a stake in India's largest e-commerce firm, Flipkart Online Services Pvt., in order to strengthen its foothold in the fast-growing online retail market.

On Dec 30, 2016, Jet.com acquired Boston-based footwear-shopping website ShoeBuy, which will allow Jet.com to expand in the footwear industry. ShoeBuy will also offer access to a large assortment of products that will enhance both the variety and the customer experience. Bentonville, AR-based Wal-Mart is also aggressively foraying into the e-commerce space in China with an aim to deliver goods from its stores around the world to consumers within hours.

Further, the company continued to forge ahead with its Walmart.com initiatives, with offers like free two-day shipping on purchases of $35 or more for over 2 million items, which could earlier be availed for a membership fee of $50. Wal-Mart also expects to expand its online grocery pickup – Walmart Grocery – from the current 600 to roughly 1,200 stores in fiscal 2018.


However, it still faces many headwinds which are likely to impact earnings in the near term. Higher expenses, lower margins at Wal-Mart U.S. and currency headwinds are expected to affect the results. Nevertheless, the company’s efforts to boost sales and regain investors’ confidence remain impressive.

Share Price Movement

Wal-Mart Stores has increased in comparison to the index’s decline since the past one year. We note that in the said period, the stock gained 3.3%, in comparison to the Zacks categorized Retail-Supermarkets industry’s decline of 0.6%. Further, the company delivered positive earnings surprises in the past six consecutive quarters.

Key Picks

Better-ranked stocks in the retail sector are The Children's Place, Inc. PLCE and Kate Spade & Company KATE.

While Children’s Place sports a Zacks Rank #1 (Strong Buy), Kate Spade carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

While Children’s Place has an expected long-term earnings growth of 10.3%, Kate Spade has an expected earnings growth of 28.3% for the next three to five years.

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