Has Walmart really turned Around?

Walmart (NYSE: WMT) reported some good earnings and sales numbers, but has the largest retailer in the known universe really turned around?

To answer that question I took a look at the ycharts financial information and some of the data in the slideshow that Walmart handed out with its earnings call. What I learned was that Walmart has sort of turned around, it is doing really well but there’s a lot of room for improvement.

One area that can definitely use improvement is revenues, which are growing at a glacial pace. Walmart reported revenues of $483.210 billion in April 2016 that grew to $483.830 billion in July, an increase of just $620 million. That was better than Target’s (NYSE: TGT) declining revenues, but it is pathetic when compared to Amazon (NASDAQ: AMZN). Amazon added $7.22 billion in revenue during second quarter 2016, rising from $113.42 billion in March 2016 to $120.64 billion in June.

That gave Walmart a total revenue growth rate of just .5% which indicates the company seems to be treading water. A proposition supported by its net sales which increased at a .1%.

The only bright spot here is that Amazon does not appear to be taking business from Walmart. Instead it appears that Amazon’s growth is coming at the expense of more upscale retailers such as Target and department stores like Macy’s (NYSE: M). Macy’s sales are so bad that chain is planning to close around 100 stores this year.

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Walmart Reports Growing Traffic, Falling Sales

Walmart did report some bright spots in its earnings presentation, this included a growing membership and other income of $644 million. That income was increasing at a rate of 61.2%, I imagine most of this growth is coming from the $49.99 shipping pass that was added to Walmart.com.

One place that did not come from was Sam’s Club where the membership income increased by just around 3.4%. It’ll be interesting to take a look at this number for third quarter 2016, when Costco Wholesale (NASDAQ: COST) suffered through a disastrous launch of its new CitiGroup Visa card.

Disturbingly Sam’s Club’s net clubs net sales fell by .2% in second quarter largely because fuel sales were down because of lower oil prices. Sales with fuel fell by -1.3% while sales without sales grew by .4%. Traffic at Sam’s Club fell by .4%.[1]

Net sales at Walmart US showed a healthy increase rising by 3.1%. Comparable store sales increased by just 1.6% in second quarter and 1.3% in the first six months of 2016, while year to date net sales increased by 3.7%. The same data indicates that comparable traffic at Walmart stores increased by 1.2% during the second quarter of 2016.

Unfortunately the numbers for online sales were too small to determine if they’ve grown or not. Such numbers would be a poor comparison because they don’t include the business of Jet.com which Walmart bought earlier this month. It will probably take around a year for Jet to affect Walmart’s revenues and sales.

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That means Walmart’s sales are increasing slightly. My guess is that Walmart is stealing business from dollar stores and drugstores. Walgreen (NASDAQ: WBA) reported that its US non-pharmacy retail sales grew by just .1%. One reason for this might be lower gas prices, which means that people are more likely to drive to Walmart than shop at a neighborhood store.

Walmart Loses Money outside the United States

So it looks like Walmart has turned around at least in the US. Although it has some big trouble outside of its homeland:

  • The biggest problems are in the United Kingdom where comp sales fell by 7.5% and traffic by 6% making for a net sales decrease of -5%. I imagine that was created by fears generated by Brexit.

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  • Walmex (Walmart’s Mexico operations) made up for that with a comp sales increase of 7.3% and a net sales increase of 8.3%, although its traffic only grew by .7%.

 

  • Canada was alright too with a comp sales increase of 1.1%, a traffic increase of 2.5% and a net sales increase of 2.9%.

 

  • Things were dismal in Brazil with a comp traffic drop of -3.5% and a net sales drop of .4%. Not even a comp sales increase of 4.7% could help the Brazilian operation.

 

  • China is also something of a failure with a comp sales drop of -.5%, and a comp traffic drop of 5%. Net sales in China increased by 2.3%.

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It looks as if might be a good idea for Walmart to dump most of its overseas operations and concentrate on the USA, Canada and Mexico. North America is profitable but Europe, Brazil and China are not.

Is Walmart Making Money?

Okay so Walmart is experiencing a modest turnaround in North America but is it making money? The answer to that question is yes.

On July 31, 2016, Walmart reported following numbers:

  • A net income of $14.73 billion up from $14.43 billion in April, but down from $15.49 billion in July 2016.

 

  • A quarterly profit margin of 3.12%.

 

  • A free cash flow of $6.328 billion.

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  • Assets of $197.89 billion.

 

  • Cash and short-term investments of $7.676 billion.

 

  • $32.22 billion in cash from operations.

 

So yes, Walmart is still making a lot of money, it’s a cash rich company and still a pretty good investment. Walmart still has a lot of float for a retailer and that is not going to change any time soon.

Walmart is Still Undervalued

More importantly I think Walmart is still undervalued at the price of $71.24 it was trading at on August 31, 2016. It had a market capitalization of $222.09 billion and an enterprise value of $258.06 billion on the same day.

That means there’s a lot of room for share price growth which makes Walmart a good short term trade. It’s also a pretty long term buy because investors were rewarded with a dividend yield of 2.8% and a return on equity of 18.85% on July 31, 2016.

All this means that Walmart is still a value investment that will keep paying off for investors for years to come. This retailer is not Amazon proof but will keep making money for a long time to come.

 

[1] http://s2.q4cdn.com/056532643/files/doc_financials/2017/Q2/Q2FY17-Earnings-Presentation-FINAL.pdf