Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Wal-Mart Profit: Weaker Than It Looks

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

On Thursday morning, Wal-Mart (NYSE: WMT  ) reported fourth-quarter EPS of $1.67, ahead of analyst estimates for EPS of $1.57. The earnings beat was especially welcome after reports surfaced last week about poor sales trends in January and early February. The better-than-feared earnings report led to a relief rally on Thursday, with shares gaining 1.5% in a down market.

Not so fast
However, the Wal-Mart earnings report was weaker than it may have appeared at first glance. The company posted 11% EPS growth, but this was largely attributable to one-time tax benefits. If we ignore the change in Wal-Mart's effective tax rate, earnings growth was anemic; pre-tax income grew by just 3%. In the U.S., which represents more than 70% of Wal-Mart's sales, the company posted a comparable-store sales increase of 1.3% (including Sam's Club warehouses). Total company sales grew by 3.9%, helped by new store openings and better sales growth in international markets.

Wal-Mart's guidance was also uninspiring. For Wal-Mart U.S., the largest operating segment, management confirmed last week's rumors of a slow start to February. Management primarily blamed delayed income tax refunds compared to 2012 for the weak sales trends. The sales trend apparently improved late last week, but it is too early to know whether that improvement is sustainable.

As a result of the weakness at the beginning of the first quarter, Wal-Mart U.S. is projecting flat comparable-store sales this quarter. The Sam's Club warehouse segment projects comp sales flat to up 2%. Furthermore, Wal-Mart guided first-quarter EPS at $1.11 to $1.16, somewhat better than last year's first quarter, but below the average analyst estimate of $1.18. The midpoint of Wal-Mart's full-year EPS guidance of $5.20 to $5.40 was also below expectations.

Better opportunities

At 14 times trailing earnings, Wal-Mart is not particularly cheap compared to other major retailers. Wal-Mart's P/E is higher than that of Target (NYSE: TGT  ) , Macy's (NYSE: M  ) , and Kohl's (NYSE: KSS  ) . Costco (NASDAQ: COST  ) does have a significantly higher valuation, but also offers high-single-digit revenue growth, unlike Wal-Mart.

WMT PE Ratio TTM Chart

Retailer P/E Ratio Comparison, data by YCharts.

Costco is a little pricey for my taste, despite its leading position in the warehouse segment. Its low-price advantage has helped it grow despite the sluggish U.S. economy, but that does not make it immune to economic weakness. Sales growth dropped off last month; if the trend continues, Costco could experience painful multiple contraction. Kohl's has also experienced weak sales and poor execution recently, justifying its industry-trailing earnings multiple.

However, Macy's and Target both seem to represent better investment opportunities than Wal-Mart right now; they offer better growth prospects at lower earnings multiples. Target's comparable-store sales underperformed Wal-Mart's last quarter, at 0.4%, but the company has a much bigger international growth opportunity. Target plans to enter the Canadian market in a big way this year, opening 125 stores beginning next month. Meanwhile, Macy's generated a 3.9% gain in comparable-store sales last quarter, and 3.7% for the full year, driven by a greater-than-40% increase in online sales.

With Target offering superior international growth prospects, and Macy's providing a better record of consistent comparable-store sales growth, these companies appear to be better investment candidates than Wal-Mart.

Another perspective on Costco
Is the ride over for Costco investors? To answer that and more, we've compiled a premium research report with in-depth analysis on Costco. Simply click here now to gain instant access to this valuable investor's resource from the Fool.

Read/Post Comments (1) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Add your comment.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2272135, ~/Articles/ArticleHandler.aspx, 9/29/2016 5:03:05 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 7 hours ago Sponsored by:
DOW 18,339.24 110.94 0.61%
S&P 500 2,171.37 11.44 0.53%
NASD 5,318.55 12.84 0.24%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/28/2016 4:00 PM
WMT $71.79 Down -0.54 -0.75%
Wal-Mart Stores CAPS Rating: ***
COST $149.41 Down -1.04 -0.69%
Costco Wholesale CAPS Rating: ****
KSS $42.51 Down -0.19 -0.44%
Kohl's CAPS Rating: **
M $36.10 Down -0.50 -1.37%
Macy's CAPS Rating: **
TGT $67.82 Down -0.47 -0.69%
Target CAPS Rating: ***