Wal-Mart Stores (NYSE:WMT) announces earnings tomorrow where earnings expectations are $1.29 for the quarter. The large-cap retailer has been in the news a lot lately as a result of job cuts in the e-commerce division plus also an acquisition in that area. We are long this name in our portfolio due to the company being slightly undervalued but also because Wal-Mart offers a portfolio significant downside protection. This company’s low beta, strong competitive advantages and significant scale in terms of its footprint and diversification definitely bring an element of security to its shares. It may not outperform other stocks in the retail sector but with sentiment at all time highs in US equity markets at present, I feel now is very much the time to only have quality in one’s portfolio and not to attempt to swing from the fences.
Wal-Mart has just announced another dividend raise, yet its payout ratio still remains well under 50% and the equity on its balance sheet remains almost double the firm’s interest bearing debt. I have written before that I believe Wal-Mart due to the significant scale advantages that it enjoys will eventually become successful with its e-commerce operations. It’s just a matter of time. Yes, it will be work in progress for many years to come but only a fool would bet against Wal-Mart especially in the US where its bargain basement brand has been ingrained into the minds of its customers for decades. Despite the growth of e-commerce in recent times, the quickest way to buy goods (especially an area like groceries where Wal-Mart is very strong) is by going directly to store and purchasing on-site. Free curbside pickup would seem only to bring more people into the stores as Wal-Mart will target its Supercenter growth plans (and investment on existing facilities) to be completely in line with its e-commerce objectives.
The new CEO of the company’s e-commerce wing, Marc Lore, has wasted no time in putting his stamp on Wal-Mart’s online objectives. On top of bringing in his own leadership team, he recently fired 200 employees who simply didn’t fit into his plans for e-commerce going forward. I alluded to Wal-Mart’s balance sheet earlier and it is crucial as e-commerce sustained growth has been a stop-start process for the retailer over the past few years. Basically, the cash flow from its offline sales has and is being used to bolster the online division which is definitely an area that Wal-Mart needs to protect in terms of market share. However, if Lore can pull off what he did at Jet.com even only to a remote extent, then things have to be looking up for Wal-Mart.
Lore will attempt to use an algorithm to basically decrease the price of a customer’s ticket based on the frequency of purchase, fulfillment and customer service. Amazon (NASDAQ:AMZN) may have a sizable edge over Wal-Mart in terms of delivery speeds and product range but one would have to say that Wal-Mart (especially on some of their in-house products which are sold en masse) are very competitive on price on core products. Building customers baskets around these core products will be Lore’s long term plan. Don’t underestimate either the power of Wal-Mart’s present foot-traffic. These customers, in my opinion, will at least have an e-commerce purchase history over time even if they only partially use the curbside pickup option.
In this day and age, information is king and over the long term, it is much more valuable to Wal-Mart if they have the majority of their customers online as then the company can then clearly see purchasing history. Knowing what a customer buys, when they buy and how often means Wal-Mart can over time carefully craft attractive offers, which should eventually add to margins. Remember, Wal-Mart has always been a “sum-of-all-parts” company where volume has always been the priority. If revenues increased, then margins would at worst stay the same if not increase also. Remember Jet.com had to spend a fortune to get customers to its online portal. Wal-Mart will spend but already has an army of hungry customers who are keenly attuned to price. If Lore can get these price-conscious shoppers online and also work wonders with his logarithms, Wal-Mart can make significant gains here which is why we will remain long.
Technically Wal-Mart is slightly overbought but we have decided not to sell option premium here at earnings for the premium portfolio. Shares in VF Corp (NYSE:VFC) were called away for a nice profit on Friday. We want to retain a presence in retail in case of the stock spikes to the upside on the 21st. Long Wal-Mart.
Edited for grammar and readability.