What’s Causing Walmart’s Woes

What’s Causing Walmart’s Woes

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Walmart (WMT) may promise “Low Prices. Every Day. On Everything” but it was particularly aggressive about offering discounts at holiday time – and now it’s paying the price.

While more focused and higher-end rivals like Macy’s (M), Saks (SKS) and Home Depot (HD) posted upside earnings surprises and were rewarded by investors, Walmart fell short of expectations, reporting net income for the fourth quarter of $1.50 a share, down from $1.70 in the year-earlier period, and sales that also disappointed retailing analysts.

After reporting those numbers Tuesday, Walmart stock retreated 2.45 percent yesterday, bringing its loss this week to 6.2 percent.

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It’s not all bad news in Bentonville, Ark., though: Walmart’s sales, while disappointing to Wall Street, are still higher than they were last year. It remains a huge global player and its international operations are doing well. But it’s being squeezed by other retailers, from direct rivals like Costco (COST) and Target (TGT) to Dollar Tree (DLTR) and other discounters. Nor can it innovate its way out of trouble. It had tried to improve performance by de-cluttering stores and trimming the number of products it sold but was forced to reverse those decisions last year after the changes hurt sales. So while the company may be in better shape now, it is still working on fixing up its stores and implementing its revised strategy – and its results will continue to reflect that. "There is no doubt that we are reducing expenses and investing in lower prices for Walmart customers. You can expect margins to decline as we put these initiatives into place," CFO Charles Holley told analysts on the earnings call this week.

In the era of the Internet and tools that allow customers to check out your prices and compare them to those of your rivals before ever setting foot in a store, there’s not much a budget retailer can do beyond slash prices to the bone, like Walmart did. But these days, its customers – those same hurting lower middle-class consumers whose votes politicians are appealing for – aren’t feeling affluent enough to indulge in the kind of sudden splurges or impulse buys that might add up to big gains for Walmart.

Analysts have jumped on the earnings announcement as a reason to cut their ratings on the stock, and that’s probably the right thing to do. The retail industry overall is still trying to recover, and it isn’t the Walmarts of the world that seem to possess the secret of thriving in the 21st century.

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Most investors would be better off finding a way to build a retail portfolio that includes some niche bricks and mortar retailers  (like Home Depot, whose earnings soared 32 percent) or those that have combined a strong online presence with some other edge, such as being able to appeal to more affluent consumers. Adding a Saks stock to a share of Dollar Tree might get you a similar demographic exposure (at least conceptually!) as well as stronger financial results. Throw in some online retailers – a bit of Amazon.com (AMZN), perhaps – and the result likely will continue to do better than a behemoth like Wal-Mart in the current market environment.

The one advantage Wal-Mart can provide is a healthy yield, one that the recent slump in the company’s share price has made still more alluring. But a 2.5 percent annual dividend isn’t likely to compensate for earnings growth and a higher stock price, except in the eyes of the most fearful and risk-averse consumer, especially if stock prices continue to march generally higher. Wal-Mart’s earnings release has offered investors shopping for stocks a new kind of consumer warning: “Buy at your own risk.”