RUDD: As Amazon aims for jugular, Walmart is armed and ready

By Lauren Rudd

My past references to Walmart greeters were not intended to disparage Walmart or their greeters. On the contrary, I like Walmart, its shares, its management and the fact that they are willing to offer employment to the elderly and disabled.

Nonetheless, no one should need to spend their golden years working at minimum wage. Investing in equities, while not a guarantee, does help ensure a successful retirement, assuming you find corporations with winning records of accomplishment. Which brings us back to Walmart (WMT).

Why is Walmart of such interest right now? Simply because Amazon is going for Walmart ’s jugular and Walmart is looking to slay its latest competitor. Walmart takes no prisoners.

When I last wrote about the company a year ago, my earnings estimate for fiscal 2017 (Walmart ’s fiscal year ends Jan. 31, so we are now in fiscal year 2018) was $4.50 per share, with a 12-month target price on the stock of $77. So how did the world's biggest retailer do? Earnings came in at $4.32, a bit light of my estimate, and the shares recently closed at $78.54.

Those numbers do not tell the whole story, however. Walmart reported $78.7 billion in domestic revenue for its second quarter, or 63.8 percent of total revenues. With six out of every 10 dollars Walmart makes coming from domestic sales, Walmart 's fortunes depend on its U.S. performance.

Walmart reported sales growth of 1.8 percent when compared to the same period a year ago. An excellent number considering the way most retailers are suffering from the industry’s competitive squeeze.

The company’s strong performance can be attributed in part to its recent successes in e-commerce. For the second quarter, e-commerce accounted for 70 basis points of Walmart ’s growth (100 basis point is equal to one percentage point), compared to 40 basis points in the same quarter a year ago.

With e-commerce keeping its sales numbers moving, Walmart improved its average sale per customer without hurting traffic. And it has steadily improved its digital sales channels through acquisitions, as well as free two-day shipping without membership fee, offering multiple pick-up methods, etc. Although acquisitions helped, most of company’s online sales growth was organic.

Walmart’s stock keeping units (SKUs), or unique items in inventory, have increased from 10 million in the first quarter of 2017 to 67 million at the end of the second quarter.

So, how close is Walmart to mounting a direct challenge to Amazon on its own turf? If Walmart can maintain its current online sales growth, it will come closer and closer to that goal every year.

Keep in mind that Walmart already has stores within 10 miles of 90 percent of the U.S. population. The combination of large stores, smaller-format Neighborhood Market stores and online operations will allow Walmart to ship products more efficiently to its customers and offer better prices for those customers desiring to pick up their purchases.

Last-mile shipping is the most expensive part of the online ordering journey, and Walmart sits on a huge advantage due to its vast physical presence compared with Amazon's physical footprint.

Finally, second-quarter operating income was $4.6 billion, representing an operating margin of 5.86 percent. What if Walmart chose to lower that to 1.9 percent, which was Amazon's operating margin during the second quarter. I do not believe Walmart will do so, but the threat is there.

The intrinsic value of the shares, using a model of free cash flow to the firm, is $153 per share. My earnings estimate for fiscal 2018 is $4.38 per share, with a 12-month target price on the stock of $86, for an annualized gain of about 10 percent. There is also an indicated dividend yield of 2.59 percent.

Note to Readers: I will again be teaching two courses for Ringling College’s Lifelong Learning Academy — Introductory Investment Analysis and Portfolio Management. Classes begin Sept. 25 and run every Monday for eight weeks. Call 941-309-5111 or go to RCLLA.org.

Send comments and questions to Robert Stepleman, Dow Wealth Management, 8205 Nature’s Way, Lakewood Ranch, FL 34202, or rsstepl@tampabay.rr.com. Follow him on Twitter @logicalinvestor. Stepleman is associated with Dow Wealth Management LLC as a lecturer and chief portfolio strategist. He offers advisory services through Bolton Global Asset Management, an SEC-registered investment adviser. Past performance is not indicative of future results. The data and performance information is for informational purposes only and is not intended as a solicitation.

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