Just this morning, Wal-Mart Stores, Inc. (NYSE:WMT) issued disappointing guidance for next fiscal year that called for earnings per share to remain approximately flat compared to consensus expectations for 4.4% growth.
The company also moderated its plans for new store openings. As seen below, new supercenter openings are expected to be almost cut in half from this fiscal year (60) to next (35).
Source: Wal-Mart Press Release
In other words, Wal-Mart’s growth will increasingly depend on same-store sales and the company’s e-commerce activities. Additionally, fewer store openings reduces the company’s capital expenditures, driving free cash flow higher.
With over 90% of Americans already living within 10 miles of a Wal-Mart store, these actions should hardly come as a surprise.
Wal-Mart’s playbook for the next decade is certainly very different from the last. The company clearly realizes the importance of e-commerce and knows it is years behind Amazon.
I view Wal-Mart’s recent $3.3 billion acquisition of Jet.com, a fast-growing e-commerce business, as a sign of desperation to step-up its own digital capabilities.
Despite pouring billions into its loss-making web business, Wal-Mart’s online sales growth has slowed considerably over the last two years (Amazon continues reporting double-digit growth despite doing more online business than anyone else):
Acquisitions often have many unintended consequences, and the relatively small scope of Jet.com hardly makes it look like Wal-Mart’s knight in shining armor. Jet.com’s revenue projection for 2020 is still a fraction of Amazon’s and eBay’s current sales.
Nonetheless, Wal-Mart will continue to invest heavily in e-commerce, and this is ultimately the right move if it wants to keep its business relevant for the rest of the 21st century.
However, it says a lot about Amazon’s edge when the largest brick-and-mortar business in the world is finding itself so challenged to build momentum in e-commerce.
Of course, as I previously discussed, Wal-Mart is also challenged by rising labor and health care costs.
With new store growth screeching to a halt, e-commerce activities looking like they will continue losing money for years, the brick-and-mortar retail environment as competitive as ever, and labor force costs rising, Wal-Mart sure has its work cut out for it to sustainably grow earnings over the next five years.
Until Wal-Mart shows clearer signs that it can (profitably) become a viable number two player to Amazon in the e-commerce world, it’s hard for me to get excited about the business.
Other brick-and-mortar stores are also racing against the company, and it’s crucial for Wal-Mart to assert itself as a legitimate online player if it doesn’t want to bleed away its 250+ million customers over the next decade.
Wal-Mart’s capital allocation strategy is undergoing a meaningful shift that will impact the company’s long-term future. Capital expenditures are continuing to shift away from new store openings in favor of e-commerce investments.
While this is the right move on paper, Wal-Mart’s results in recent years leave a lot to be desired. The company’s acquisition of Jet.com is another signal that Wal-Mart’s organic digital strategy is in need of help.
Investing more heavily in e-commerce is the right long-term move for the business, but shareholders could be left waiting for a number of years before seeing positive results. Wal-Mart has the scale and capital to be a force in e-commerce, but it is far from guaranteed to own the number two position behind Amazon thanks to the way technology has changed the game for businesses and consumers alike.
Wal-Mart’s dividend remains extremely safe, but the company’s 2.8% yield and 16.2x forward price-to-earnings multiple don’t excite me for a mature business struggling to reignite sustainable earnings growth.