4 Reasons To Buy Walmart After 10% Plunge

A monitor displays Walmart Inc. signage on the floor of the New York Stock Exchange (NYSE) in New York, U.S., on Monday, Feb. 5, 2018. Photographer: Michael Nagle/Bloomberg

The 10% plunge in Walmart shares on Feb. 20 -- which slashed $31 billion from its market capitalization -- looks like a buying opportunity. (I have no financial interest in the securities mentioned in this post).

Sure Walmart's missed its numbers. Walmart's adjusted EPS of $1.33 a share for its fourth quarter were four cents below what analysts polled by Thomson Reuters expected, according to the Wall Street Journal.

Sales were up 2.6% for the quarter ended Jan. 31 but online sales grew a mere 23% -- well-below "three previous quarters of more than 50% growth," according to the Journal.

Expectations for the future also fell. Walmart said EPS for the fiscal year would be between $4.75 and $5.00 -- "lower than some had been anticipating, mainly due to a smaller-than-expected benefit from recent tax-code changes," noted the Journal.

Here are my four reasons Walmart shares look more attractive now.

1.Walmart is learning e-commerce

It is a huge management challenge for a company that's successful at land-based retailing to shift to e-commerce. Walmart began trying that in the 1990s and got little traction.

But now e-commerce accounts for nearly 4% of Walmart’s over-$500 billion in annual revenue. Things began improving significantly for Walmart in September 2016 when it acquired online store Jet.

Walmart also launched new features "like free two-day shipping on more items; an expanded online selection helped boost online sales quickly; and added hundreds of online grocery pickup locations at stores," according to the Journal.

But Walmart is seeing the problems that come from the shift to e-commerce.

CEO Doug McMillon said that TVs and toys took up so much space in Walmart’s e-commerce warehouses during the holiday that there was not enough room for non-seasonal items like toilet paper. As a result, Walmart ran out of items in its inventory which hurt online sales.

Walmart is also shifting the focus of its marketing spend from Jet customers -- which are higher-income, urban shoppers -- to acquiring new customers for its main Walmart website.

This is good news for the long-run because Walmart is actually doing something about e-commerce. And as Amazon has amply demonstrated, trying new things leads to mistakes -- anyone remember the Fire Phone fiasco?

2. Walmart has economies of scale

Not surprisingly, lower e-commerce prices mean lower margins. But Walmart has the potential to use its scale to get even lower prices by demanding bigger volume discounts from its suppliers.

Indeed, Walmart is over twice as large as Amazon. But Walmart is considerably behind Amazon when it comes to figuring out how to optimize its supply chain for e-commerce. And no doubt there are many problems it faces when that supply chain must serve both retail stores and online ones.

But Amazon's 2.3% operating margin and 24% five year average revenue growth -- which is far faster than Walmart's 1.7% average growth -- suggest that Walmart will need to cut way back on its 4.5% operating margin.

And as Amazon's soaring stock illustrates -- if you tell investors to expect you'll cut prices and costs to grow faster, they will reward you if you deliver.

If Walmart can keep getting better at optimizing its e-commerce supply chain, it may be able to deliver on this premise.

3. Walmart is acting as though loyalty matters

In the long-run it pays to make your people happy -- especially in a business that depends on good service to keep customers coming back. And as I wrote back in October 2016, many years ago I experienced Walmart's bad customer service when I asked a store employee to help me buy a video game for my son -- and the employee hid behind some boxes until I gave up.

A monitor displays Walmart Inc. signage on the floor of the New York Stock Exchange (NYSE) in New York, U.S., on Monday, Feb. 5, 2018. Photographer: Michael Nagle/Bloomberg

The 10% plunge in Walmart shares on Feb. 20 -- which slashed $31 billion from its market capitalization -- looks like a buying opportunity. (I have no financial interest in the securities mentioned in this post).

Sales were up 2.6% for the quarter ended Jan. 31 but online sales grew a mere 23% -- well-below "three previous quarters of more than 50% growth," according to the Journal.

Here are my four reasons Walmart shares look more attractive now.

1.Walmart is learning e-commerce

It is a huge management challenge for a company that's successful at land-based retailing to shift to e-commerce. Walmart began trying that in the 1990s and got little traction.

But now e-commerce accounts for nearly 4% of Walmart’s over-$500 billion in annual revenue. Things began improving significantly for Walmart in September 2016 when it acquired online store Jet.

Walmart also launched new features "like free two-day shipping on more items; an expanded online selection helped boost online sales quickly; and added hundreds of online grocery pickup locations at stores," according to the Journal.

But Walmart is seeing the problems that come from the shift to e-commerce.

Walmart is also shifting the focus of its marketing spend from Jet customers -- which are higher-income, urban shoppers -- to acquiring new customers for its main Walmart website.

2. Walmart has economies of scale

Not surprisingly, lower e-commerce prices mean lower margins. But Walmart has the potential to use its scale to get even lower prices by demanding bigger volume discounts from its suppliers.

But Amazon's 2.3% operating margin and 24% five year average revenue growth -- which is far faster than Walmart's 1.7% average growth -- suggest that Walmart will need to cut way back on its 4.5% operating margin.

And as Amazon's soaring stock illustrates -- if you tell investors to expect you'll cut prices and costs to grow faster, they will reward you if you deliver.

If Walmart can keep getting better at optimizing its e-commerce supply chain, it may be able to deliver on this premise.

3. Walmart is acting as though loyalty matters

In the long-run it pays to make your people happy -- especially in a business that depends on good service to keep customers coming back. And as I wrote back in October 2016, many years ago I experienced Walmart's bad customer service when I asked a store employee to help me buy a video game for my son -- and the employee hid behind some boxes until I gave up.

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