Wal-Mart (WMT - Analyst Report) shares first became a Zacks #5 Rank this year in April when shares were trading $78. They earned that Rank again this week after a disappointing earnings report and outlook.
The world's largest retailer, with a market capitalization of $220 billion, dampened investors’ mood on Tuesday after its second-quarter fiscal 2016 results lagged earnings expectations and management provided lackluster guidance, citing increased investments in employee wages and training as well as weak margins in its U.S. pharmacy business.
Miss and Guide Lower
Earnings per share of $1.08 were 4 cents below the Zacks Consensus Estimate and 10.7% lower from the year-ago earnings. Revenues inched up 0.1% year over year to $120.23 billion, which surpassed the Zacks Consensus Estimate of $119.97 billion.
The mega retailer announced that they will continue to invest in global e-commerce initiatives, new wage structure and workers’ training. These strategic operational improvements are expected to dilute earnings by 8 cents in the ongoing third quarter and by 24 cents for fiscal 2016.
Additionally, the headwinds in the U.S. pharmacy business will reduce earnings by 3 cents in the ongoing quarter and 11 cents for the full year. Further, incremental investment in global e-commerce and currency translation will impact full-year earnings per share by 6-9 cents and 15 cents, respectively.
Considering these factors, Wal-Mart cut its earnings guidance for the full year to $4.40–$4.70 from the previous guidance of $4.70–$5.05. For the third quarter, it expects earnings in the range of $0.93–$1.05. The guidance reflects a substantial decline from the prior year numbers of $4.99 for fiscal 2015 and $1.15 for third-quarter 2015.
A Quarter Later, Same Story
In April, my colleague Eric Dutram chose WMT for his Bull of the Day article and talked about the retail tailwind we all expected to materialize...
Many investors probably thought that the sudden drop in oil prices would be great news for retailers across the board. This was especially supposed to be the case for retailers targeting the low end as consumers here would really feel the benefit of slumping oil prices.
However, for many this hasn’t really been the case as most of the gas savings have gone right into checking accounts and little has trickled down into discretionary purchases. This reality has hit shares of the biggest retailer in the country, Wal-Mart (WMT - Analyst Report), hard as shares have been under pressure for the Arkansas-based giant.
In fact, shares of WMT are off close to 10% so far in 2015, easily underperforming the more or less flat return for the S&P 500 in the same time period. This is especially poor when you consider that the broad retail ETF (XRT) is actually outperforming the S&P 500 so far this year, putting even more distance between Wal-Mart and the rest of the industry.
Now, WMT shares are off over 20% for the year. And from the looks of the stock reaction this past week following earnings, this was not in the cards for most investors.
You can shop Wal-Mart (if you must), but stay away from the stock for now until the earnings momentum turns around. The Zacks Rank will let you know.
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