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Wal-Mart (WMT) Appears Bright: Should You Hold the Stock?

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A prudent investment decision involves buying stocks that offer solid prospects and selling those that appear risky. Again, at times it is rational to hold certain stocks that have enough potential but are weighed down by tough market conditions. These stocks rally as soon as the market enters into a correction mode. Here we have discussed one such stock, Wal-Mart Stores, Inc. (WMT - Free Report) , with expected long-term earnings per share growth rate of 3.39% and a VGM Score of “A”.

Wal-Mart’s stock price history reveals that the company hasn’t been a disappointment in a long time. This is quite prominent from the 20.3% surge in the company’s shares on a year-to-date basis. We believe that this rally has been driven by Wal-Mart’s impressive earnings history and solid growth strategies.

Starting with the company’s past performance, we note that it has recorded positive comps at Wal-Mart U.S. for the past eight quarters, after delivering negative comps since the third quarter of fiscal 2013. Traffic improved for seven consecutive quarters, backed by the company’s efforts to modernize its stores to boost traffic. Traffic was also driven by a moderate improvement in consumer spending. Further, Wal-Mart’s efforts to change its stores to suit consumers’ demand helped it attract some shoppers. In fact, the retailer continues to expect positive comps year over year at Wal-Mart U.S. in fiscal 2017.

During the last reported second-quarter fiscal 2017, both its earnings and revenues exceeded the Zacks Consensus Estimate. Revenues increased 0.5% owing to an improvement in comps, but earnings declined year over year.

WAL-MART STORES Price and Consensus

 

WAL-MART STORES Price and Consensus | WAL-MART STORES Quote

Despite posting better-than-expected results, we note that Wal-Mart is facing several challenges. The company is exposed to intense competition on all fronts, from dollar stores to traditional grocery store chains and online business. Its international operations are also under pressure with a stronger dollar eating into sales.

Wal-Mart also expects to incur huge eCommerce expenses over the near term, as management continues to invest in its eCommerce business. The company’s focus on eCommerce will in turn lower profit margin potential, given the shipping costs and price competition involved in it.

Wal-Mart has also pledged to invest worth $2.7 billion on raising employees’ wages and giving them extra training in fiscal 2017. Under the initiative, the company had increased its minimum wage to $9 an hour in Apr 2015, and to $10 per hour in Feb 2016. The initiative of paying higher wages is expected to help reduce turnover and increase retention. The company will also improve its customer service and this should ultimately encourage shoppers to spend more. However, it will further raise the expense burden on the retailer. Higher labor costs, along with the company’s efforts to overhaul its stores and invest in its online operations, will weigh on earnings.

Nevertheless, it is encouraging to note that the company is making efforts to understand the evolving needs of its customers to regain their confidence, and thus boost sales. The decision to close 269 small-format Express outlets in Jan 2016 was one such initiative to streamline the chain.

The retail giant, Wal-Mart also aims to expand its online business through acquisitions. Recently, it completed the acquisition of eCommerce company, Jet.com, Inc., which marked a huge step forward in its quest to dominate ecommerce king, Amazon.com, Inc. (AMZN - Free Report) . The company has updated its fiscal 2017 guidance to reflect the acquisition of Jet.com. Wal-Mart now expects its earnings in the range of $4.15−$4.35 per share, up from $4.00−$4.30 expected earlier.

Wal-Mart is also in talks to invest in India's largest eCommerce firm, Flipkart Online Services Pvt. in order to expand in the fast-growing online retail market and grab market share in the country.

Apart from acquisitions, Wal-Mart has also launched its own mobile payment system called Walmart Pay. This allows shoppers to pay through its existing smartphone app. Last month, Wal-Mart inked an agreement with CommerceHub, a leading distributed commerce network for retailers and brands, to expand its existing partnership.

Bentonville, AR-based Wal-Mart is also aggressively trying to get a share of online grocery delivery, a booming industry. The largest grocer in the U.S. is already expanding its online order options to offer grocery deliveries within two days for a $49 minimum annual fee through its ShippingPass eCommerce subscription program. The program competes with Amazon’s Prime service, which costs $99 annually. It has also partnered with ride hailing services, Uber and Lyft for speedy online grocery deliveries. Moreover, it intends to roll out drones in the near term for product deliveries to Wal-Mart facilities as well as to consumer homes.

We expect the aforementioned factors to help this Zacks Rank #3 (Hold) company to sustain its strong momentum and stay afloat even amid difficult times. Hence, we suggest investors to hold on to the stock as the rest is a wait-and-watch story.

Stocks that Warrant a Look

Some better-ranked stocks in the retail sector include Big Lots Inc. (BIG - Free Report)    and L Brands Inc. (LB - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Big Lots has an average earnings beat of 8% in the last four quarters and estimates have witnessed an uptrend in the last 60 days.

L Brands has to its credit a favorable surprise trend, with an average beat of 8.64% in the trailing four quarters and estimates have moved up in the last 60 days.

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