Walmart (WMT -0.74%) has turned into one of the few bright spots of the COVID-19 crisis. As an "essential" business, it not only avoided closure even as most department stores shut down, but it also saw an apparent surge in retail activity. When the company releases its earnings for the February-to-April quarter on May 19, investors will get a glimpse of how the crisis has affected short-term revenue and profits.
However, many invest in stocks for the long term. Hence, those investors will likely be speculating on how the next earnings report will affect Walmart's performance in future years as well. Before the coronavirus pandemic, Walmart stock had benefited from successes in migrating to an omnichannel retailing system. A return to growth in recent quarters also indicated a higher likelihood that it would successfully fight off challenges from competitors such as Amazon, Costco, and Target.
Five years from now, this pandemic battle will probably have entered a different phase or have become forgotten altogether. Hence, investors trying to estimate performance five years from now need to look at more long-term indicators.
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Walmart as an omnichannel retailer
Walmart, like many retail stocks, struggled in the middle of the decade. Opportunities at home dwindled as the U.S. market became saturated, and stores experienced failures in multiple international markets. With e-commerce taking an increasing share of the market, Walmart faced an uncertain future.
However, purchasing Jet.com and taking a more online-oriented approach changed perceptions about Walmart. Same-store sales returned to growth. Omnichannel retailing also offered a physical store and online combination that Amazon could not match. Furthermore, Walmart's purchase of India-based Flipkart provided the company with a second chance to succeed outside of North America with an e-commerce focus.
Why omnichannel may not help
Nonetheless, while online channels benefit from double-digit sales growth, the overall company has only improved marginally. Analysts forecast earnings growth of 2.8% this year and 6.9% in 2020. This is an improvement, as profits increased by only 0.53% per year on average for the last five years.
However, many of the problems the company faced five years ago remain. More than 90% of Americans live within 10 miles of a Walmart. Outside of North America, sales growth has turned positive but remains sluggish. In the last quarter, Walmart International grew its net sales at a rate of 2.3%.
The company cited improvements in Mexico, India, and China as the reason for the growth. In China, since building an alliance with JD.Com, sales have improved. Last year, Walmart announced plans to add 500 stores. Still, even though it entered the Chinese market in 1996, its operations have only grown to 438 stores in 24 years. The expansion plan also came about before COVID-19 ravaged China. Time will tell how the pandemic affects the China growth plan.
Image source: Getty Images.
Will Walmart stock profit investors?
Despite the issues with Walmart stock, investors should not worry about the company becoming the next Sears Holdings. For all of its problems, Walmart appears poised to remain one of the country's top retailers. With a market cap approaching $350 billion, it manages to drive traffic to its stores and websites.
However, Walmart stock only holds limited appeal to new investors. Despite earnings growth levels mired in the single digits, Walmart trades at around 23.6 times forward earnings. Not only does that exceed its average forward P/E ratio of about 18.6, but it also brings the price-to-earnings-to-growth (PEG) ratio to almost 4 (In general, a PEG ratio of more than 1 could imply that a stock is too expensive). The projected five-year growth rate of 5.68% per year may do little to improve that perception.
Investors will also receive a growing (but mediocre) dividend return. Since Walmart is a Dividend Aristocrat, investors have benefited from 45 consecutive years of payout increases. Even with a payout ratio of around 43.8%, less than half of company profits go to the payout. While I see little that would endanger future dividend increases, its dividend yield of approximately 1.75% comes in well below the S&P 500 average of about 2.1%.
Walmart's success with e-commerce and omnichannel shows that it will likely remain one of the top retailers for years to come. However, when one looks at the company outside of e-commerce, it continues to struggle with slow growth and continuing challenges in expanding its physical footprint. If investors turn their attention back to overall numbers, the excitement surrounding Walmart stock could easily fade over the next five years.
