We maintain our Neutral recommendation on Wal-Mart Stores, Inc. (WMT - Analyst Report) following an appraisal of its third quarter 2013 results.
Walmart posted robust third quarter earnings of $1.08 per share, which beat the Zacks Consensus Estimate by a penny and the prior-year earnings by 11.3%. The results were within the company’s earnings guidance range of $1.04 to $1.09 per share.
Top-line growth coupled with cost savings boosted earnings in the quarter. Revenue, excluding currency impact, climbed 4.9% on the back of positive comparable store sales.
We are impressed with the company’s size and scale of operations. The company’s significant exposure in the international markets makes it the largest retailer in the world.
The company has 8,500 stores in 15 countries, under 55 different names. Walmart also continues to expand internationally and in the emerging markets through accretive acquisitions, new store growth and positive comparable store sales.
Further, Walmart has also been focusing on expanding its online business and has already developed its online businesses in the U.S., U.K., Canada and Brazil. To further expand its e-commerce business, Walmart has increased its controlling stake to 51% in the Chinese Internet retailer Yihaodian. The world’s largest retailer also acquired the Vudu streaming video service from Netflix Inc. (NFLX) in February 2010 and California-based technology company Kosmix in April 2011, demonstrating its commitment to e-commerce.
Besides expansion, Walmart has been rewarding its shareholders by increasing dividend every year. This also reflects that Walmart has been able to grow its free cash flow per share at an impressive rate over the same time period.
However, the fiscal cliff, if implemented, will burden Walmart’s shareholders with huge taxes. Shareholders could end up paying taxes as high as 39.6%, up from 15% currently. U.S. President Obama is, however, trying to keep it at 23.8%, but Walmart’s investors still remain uncertain and apprehensive about the fiscal cliff.
The term ‘fiscal cliff’ in the U.S. refers to the effect of a number of laws, which could result in tax increases and spending cuts, if implemented, thereby resulting in budget deficit beginning in 2013. These laws include tax increases due to the expiration of the Bush tax cuts and spending cuts under the Budget Control Act of 2011.
Though it will improve long-term economic growth by reducing debt, the fiscal cliff is expected result in a recession and push up unemployment rate during 2013, if the deficit is reduced suddenly.
Additionally, Walmart remains exposed to unfavorable foreign currency translations due to its considerable international presence. With rising investments in markets outside the U.S., Walmart also faces economic and political risks. In addition, the company operates in a highly competitive retail market.
Walmart also needs to be more competitive as U.S. shoppers seek discounts on items to curb expenses. Moreover, we remain cautious about the weak economy and rising costs, which keep us on the sidelines.