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Analyst Blog

It seems that the retail giant Wal-Mart Stores, Inc. (WMT - Free Report) is leaving no stone unturned to compete with brick-and-mortar rivals, especially e-commerce king Amazon.com Inc. (AMZN - Free Report) . In this regard, the company continues to make huge investments in e-commerce initiatives, including acquisitions.

Continuing the trend, Wal-Mart’s subsidiary Jet.com (acquired in Sep 2016) has recently purchased trendy online clothing seller ModCloth, a move aimed at expanding the e-commerce business. Although the details of the deal have not been disclosed yet officially, media reports claimed that the buyout was worth $51–$70 million. Post the acquisition, ModCloth will continue to operate its own website as a standalone and complementary brand.

ModCloth is Wal-Mart’s third acquisition in 2017, aimed at raising a stake in the online business. In 2017, Wal-Mart bought Moosejaw, an outdoor apparel and gear retailer for $51 million and e-commerce shoe retailer ShoeBuy for $70 million.

We note that apparel is the top retail category in terms of online sales, and Wal-Mart is likely to position itself in this high-growth segment which is currently dominated by Amazon.

Wal-Mart Stores, Inc. Price, Consensus and EPS Surprise

 

Wal-Mart Stores, Inc. Price, Consensus and EPS Surprise | Wal-Mart Stores, Inc. Quote

Meanwhile, the company's increased investment in Walmex hints at its efforts to hold substantial market share in Mexico where Amazon is expanding. Bentonville, AR-based Wal-Mart is also aggressively foraying into e-commerce in China with an aim to deliver goods from its stores around the world to consumers within hours.

In Jun 2016, Wal-Mart inked a deal with JD.com to sell its Chinese e-commerce business, Yihaodian in exchange for a 5% equity stake in the company. Later in Oct 2016, Wal-Mart increased its stake in Chinese e-commerce website, JD.com Inc., from 5.9% to 10.8%. The move was in line with the company’s aim to grab greater market share in the world’s largest online market and expand in China, where it has been struggling of late.

Apart from acquisitions, Wal-Mart has also launched its own mobile payment system called Walmart Pay in all of its 4,500-plus U.S. stores in Jul 2016. This system enables shoppers to pay through its existing smartphone app. This marks another step toward accelerating the company’s online business and making shopping easier and faster.

Wal-Mart is also aggressively trying to get a share of the pie in the online grocery shopping and delivery industry. Recently in Jan 2017, the company started offering free two-day shipping to U.S. shoppers on a minimum order of $35 on over 2 million items. This program will replace Wal-Mart's existing two-day shipping program – Shipping Pass – that charges shoppers an annual membership fee of $49.

It is interesting to note that unlike Amazon Prime (which charges customers $99 a year for two-day shipping) or Wal-Mart’s existing Shipping Pass program, shoppers does not need to pay any membership fee to avail the service. Wal-Mart also expects to expand its online grocery pickup – Walmart Grocery – from the current 600 to roughly 1,200 stores in fiscal 2018.

Owing to the growing e-commerce business, earlier this week the analyst team at Bank of America added Wal-Mart to its US-1 List. Moreover, analysts of Bank of America and Merrill Lynch expect the company's valuation to improve with time. Despite having a Zacks Rank #4 (Sell), Wal-Mart carries a VGM score of ‘A’, and a Value and Growth score of ‘A.’ This indicates that there is substantial potential in the stock.

However, it still faces many headwinds which are likely to impact earnings in the near term. Higher expenses, lower margins at Wal-Mart U.S. and currency headwinds are expected to affect the results. Nevertheless, the company’s efforts to boost sales and its e-commerce business remain impressive.

Share Price Movement

We note that in the past one year, Wal-Mart’sstock gained 3.5%, in comparison to the Zacks categorized Retail-Supermarkets industry’s decline of 0.9%. Further, the company delivered positive earnings surprises in the past six consecutive quarters.

Key Picks

Better-ranked stocks in the retail sector are The Children's Place, Inc. (PLCE - Free Report) and Kate Spade & Company (KATE - Free Report) .

While Children’s Place sports a Zacks Rank #1 (Strong Buy), Kate Spade carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

While Children’s Place has an expected long-term earnings growth of 10.3%, Kate Spade has an expected earnings growth of 28.3% for the next three to five years.

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