Are Walmart's Headwinds Long Term or Temporary?

Is it time to bail on Wal-Mart due to headwinds? Or is now the opportune time to take notice of the Goliath of retail?

Feb 6, 2014 at 4:00PM

Wal-Mart Stores (NYSE:WMT) recently lowered guidance for the fourth quarter as well as the fiscal year. The company cited several reasons for the reduced outlook. Are those headwinds temporary or long term? After establishing answers to these questions, we can determine whether or not Wal-Mart remains a quality investment. Below is a list of headwinds Wal-Mart is facing. We'll also examine whether or not these headwinds are likely to have a long-term impact on the company.

Weather
Wal-Mart stated that weather was partially to blame for reduced spending throughout the fourth quarter, after eight named storms battered most of the country.

On one hand, this makes sense. Nobody feels like braving a blizzard to sift through a bin of old $5 DVDs or to buy a $4 t-shirt. On the other hand, Wal-Mart now generates the majority of its revenue via groceries. When the weatherman calls for a storm, it sends the masses rushing to the nearest grocery store as if the Center for Disease Control just announced the imminent threat of an unstoppable plague.

Therefore, those same winter storms that should have led to softening demand for general merchandise should have also led to increased demand for food items. In other words, using weather as an excuse, though potentially justifiable, isn't acceptable. Nevertheless, it's a temporary event. 

Reduced food stamp benefits
Approximately 20% of Wal-Mart shoppers use food stamps. In 2013, food stamp funding was cut by $5 billion. When 20% of your customers take a hit, it's going to have an impact. To make matters worse for Wal-Mart, further food stamp cuts are likely this year. The only way Wal-Mart could dance around this would be to lower prices, but this would cut into margins and negatively impact profits. Food stamp cuts are a long-term headwind.

Payroll-tax "increase"
Contrary to popular belief, the payroll tax wasn't an increase. It was actually the end of a payroll-tax holiday. Prior to 2011, the payroll tax was 6.2%. In 2011, it was reduced to 4.2% in an effort to help low- and middle-income consumers weather the recession, temporarily. The payroll tax was supposed to end on Jan. 1, 2012, but it was extended an extra year. The payroll tax reverted back to 6.2% on Jan. 1, 2013, and though it's not often brought up anymore, it impacts most consumers. Wal-Mart had no problem performing well prior to the payroll-tax holiday, but people got used to easy, and that's never a positive when reality returns to the fold. Therefore, the payroll-tax "increase" is a long-term headwind. 

Online retail
As if Wal-Mart doesn't have enough problems to contend with, it must battle online retailers, especially Amazon.com (NASDAQ:AMZN). Amazon recently missed expectations, but this had nothing to do with actual results, which showed continued top-line growth. The problem for Amazon is a lack of consistent profitability. The company is considering increasing the price of its Amazon Prime service by between $20 and $40. As of right now, it costs $79 per year.

If Amazon increased its Prime membership by $40, a significant backlash would be possible, which would lead to temporary market share gains for Wal-Mart. However, if this took place, then Amazon would immediately backpedal, just as Netflix did in 2011 when it increased its membership fees by 60%.

As of right now, Amazon Prime has approximately 20 million members, and based on continuous reports of superb customer service and happy customers, this number is only going to increase going forward. This is bad news for Wal-Mart.

Wal-Mart currently offers free shipping for orders of $50 or more, but Amazon offers free shipping for orders of $35 or more. And if you're a Prime member, then shipping is always free. Of course, more people shop online today than in the past, which is a negative for Wal-Mart on the brick-and-mortar side.

On the other hand ... Wal-Mart "To Go" offers food delivery and in-store pickup, which should give it a significant edge over AmazonFresh. In-store food pickup is the key for Wal-Mart since, as of right now, it's not something Amazon can offer, and the food is guaranteed to be fresh. All that said, online retailers like Amazon are a long-term threat.

Dollar stores
Family Dollar Stores (NYSE:FDO) recently warned of an earnings decline for 2014, with expected earnings per share of $3.25-$3.55 compared to $3.83 last year. Family Dollar also announced that December comps declined 3% due to fewer customer transactions. Consumables jumped 4.7% year over year in the first quarter, but Family Dollar seems to be having the same problem as Wal-Mart -- its customers are hurting.

Dollar Tree Stores (NASDAQ:DLTR) targets the same consumer, but it's working on a number of initiatives. It's expanding its store sizes to allow more space for consumables (a key growth driver), it has a pricing advantage (consumers more attracted to $1 on all items), it's remodeling and relocating stores to maximize long-term potential, and it's investing in an omnichannel approach (catering to consumers in-store, online, and on mobile devices). Dollar Tree has also seen comps growth for seven consecutive years. And don't forget Dollar General, the largest dollar store of the bunch. 

Overall, the dollar stores, especially Dollar Tree, pose a threat to Wal-Mart over the long haul. But Wal-Mart is fighting back with smaller-format stores like Walmart Express (very early stages). Given Wal-Mart's cash flow generation and available capital to reinvest in its business, this could mean trouble for the dollar stores. 

The dollar stores are a long-term threat, but Wal-Mart is capable of winning back market share. 

The bottom line
Wal-Mart is facing a multitude of long-term headwinds that should prevent it from seeing significantly improved top-line growth. That said, there is future growth potential via its "To Go" food service and smaller format stores. In the meantime, Wal-Mart generates massive cash flow and consistently returns capital to shareholders, which still makes Wal-Mart a good value play. Please do your own research prior to investing.

Profit off a hot future trend.... 
If you thought the iPod, the iPhone, and the iPad were amazing, just wait until you see this. One hundred of Apple's top engineers are busy building one in a secret lab. And an ABI Research report predicts 485 million of them could be sold over the next decade. But you can invest in it right now... for just a fraction of the price of AAPL stock. Click here to get the full story in this eye-opening new report.

  

Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers