Big and slow
Walmart’s stock is a long-term underperformer. It’s well worth keeping that fact front and centre whenever market expectations or company forecasts take a bullish turn, like now. Shares in the world’s biggest traditional retailer are up some 20% this year, and are finally positive on a five year view too. But the 11.5% price return since early-October 2012 pales against the almost 80% rise of the S&P 500, underscoring that the $251bn giant has been beset by questions around growth for years. Those questions have been getting more pointed, of course, as retailing inexorably migrates online, a trend that Wal-Mart has largely been a non-participant observer of.
To be sure, its efforts to get involved have been persistent and steady, just not effective. Serious-looking investments and acquisitions in start-ups began as early as 2005 with the establishment of @WalmartLabs. But it wasn’t until 2012 before Wal-Mart hired a heavyweight CTO for the quasi-internal incubator. Predictably, digital revenues have been anaemic. The group expects e-commerce to make up somewhat less than 4% of total sales in 2019. That’s still an almost 50% improvement on its miniscule online take as early 2015, and follows a more than 60% surge in H1 this year.
Signs that the group’s foot dragging phase on digital growth is coming to an end are the reason why the stock bounded 4.5% higher on Tuesday, completing a six-day move just short of 10%. The group this week confirmed a more aggressive online strategy, projecting a digital sales rise of 3% in the next financial year which it sees accelerating to 40% growth the year after. The push is backed by a host of new offerings on top of already established initiatives. Customers can already pick up orders in one of its almost-5000 stores, or enjoy free two-day shipping. Soon, the group will double outlets that can ship online grocery orders, and on Monday it said it was speeding up in-store returns of online purchases. The onset of such Wal-Mart services is likely to step-up a gear as the group integrates Jet.com, the $3bn acquisition completed in March. Amazon’s sudden infringement into the grocery sector with its Wholefoods buy was announced three months afterward, but preparatory moves were almost certainly running in parallel. In short, the retail giants have finally enjoined open combat. Few would expect a battle that is shorter than half a generation. For one thing, Amazon’s $80bn net sales last year were equivalent to only 25% of Wal-Mart’s total United States, whilst the total U.S. retail market is worth $3 trillion.
Beyond the buyback
Wal-Mart has acknowledged the long-haul ahead by launching one of its largest share buybacks, worth $20bn. With e-commerce losses likely to continue well into the next decade albeit beginning to moderate in 2019, the repurchase plan—widely speculated this year—helps explain why Wal-Mart shares have already outrun their meagre 2016 gain of 6%. Even a giant buyback has limits though. And those limits are likely to be hit just as bottom-line pressure from ratcheted up investments kicks in. That’s why it would be premature to call time on Wal-Mart’s slow growth. The stock’s 50% advance since late 2011 may prove less hardy.
From a technical chart perspective, medium-term momentum could stay promising for longer. This week’s leap is part of an almost two-year gallop that is now some $6 away from January 2015’s record high. To be sure, the stock gapped sharply on Tuesday, suggesting a near-term retracement is due. But apart from that, WMT has done all the ‘right’ things over a clear rising trend line since February. It has largely remained topside of the line with orderly retracements of between 38.2% and 50% before this week. The stock also tagged the 61.8% retracement ($77) of its 2015 slide before settling on a prior support/resistance range from late 2014-early 2015. A reversal is foreseeable if Wal-Mart reaches the prior all-time high, possibly sooner. At that point traders will be looking for the stock’s ability to stabilise within the $82-$85 range mentioned above, after a likely test outside of it (see gap). Should retracements become disorderly and particularly if the $77 gives way, a correction all the way back to $70 dollars would be possible.
Figure 1 - Wal-Mart Stores Inc. daily chart
Source: Thomson Reuters and City Index
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