When you think of the strongest online retailer in the United States, what company first comes to mind? It's likely Amazon.com (NASDAQ:AMZN), which is growing considerably faster than Wal-Mart Stores (NYSE:WMT). Despite current headwinds related to the company's target low-income consumer, though, Wal-Mart U.S. has more future potential than you might think.
What you need to know
Back in October 2013, Wal-Mart announced that 90% of its supercenters were performing well. Details weren't provided, but it's safe to assume that Wal-Mart has earned the trust of its investors through the years. That's not the most recent or most specific information you can find on the company, but that percentage isn't likely to change much in less than one year, especially since Wal-Mart is focused on investing in leadership and additional staffing at underperforming locations. Divestures are also always an option, and divestures of underperforming locations would lead to increased profit growth.
Speaking of growth, Wal-Mart opened 25 supercenters in the first quarter (16 new stores/nine conversions), and is on track to open 115 supercenters for the fiscal year. Wal-Mart currently has more than 4,868 store units in the United States, so this might not seem like much, but its still net store growth. A retailer opening this many locations isn't struggling. If it were struggling, it would be closing locations to increase profitability, as mentioned above. When it comes to profitability, Wal-Mart has no problems whatsoever. In fact, consider the company's net income growth over the past ten years compared to Amazon:
Amazon is an industry-altering and highly innovative company, offering more upside potential for investors than Wal-Mart. At the same time, it also presents more downside risk. Amazon has had a strategy of pleasing the customer no matter what, even at the cost of profits. This has led to consistent revenue growth, but no-so-consistent net income growth. Despite this strategy, Amazon recently felt the pressure to deliver more on the bottom line and increased its Amazon Prime annual membership fee to $99 from $79. This should help, but Amazon still has a long way to go to deliver consistent bottom-line returns like Wal-Mart. Look again at the chart above and remember that slow and steady usually wins the race.
On the other hand, Foolish investors value free cash flow a great deal as it leads to the potential for capital reinvestments as well as capital returns to shareholders. Despite being two completely different types of retailers, they're both proficient in consistent free cash flow generation:
Wal-Mart is using part of its free cash flow to further extend its footprint. In addition to 115 supercenters for this fiscal year, Wal-Mart will add 180-200 Neighborhood Markets and 90-100 Wal-Mart Express stores.
Neighborhood Market delivered first-quarter comps growth of 5% year over year, including a 4% increase in traffic. This represents 46 consecutive quarters of comps growth at Neighborhood Market. In regards to Walmart Express, the first fully tethered store opened on May 2. Fully tethered means customers will have the opportunity to order supercenter merchandise at a rural Walmart Express store and be able to receive that merchandise on the same day. Wal-Mart has reported positive results at early pilot tests of Walmart Express stores, and this latest feature could further enhance the small-box store's potential.
New store growth should lead to long-term positive results for Wal-Mart, especially given the fact that the majority of supercenters are performing well and small-box stores are showing a lot of results and potential. There are other growth avenues as well, however.
Innovations and e-commerce
Amazon might be known as a highly innovative company, and rightfully so, but Wal-Mart should also fit into this category. Since Amazon is an online retailer (among many other things), people view it as a modern company offering breakthrough technologies. When people think of Wal-Mart, they often think of large physical retail buildings offering everyday low prices, but it's so much more than that.
Below is a quick summary of Wal-Mart's recent innovations. Keep in mind that all of these innovations took place in the first quarter alone. That being the case, how many innovative measures do you think the company is capable of in the future? First-quarter innovations:
- Brought everyday low prices to the money transfer industry with unique Walmart-2-Walmart service
- Partnered with Wild Oats (product line of organic food products)
- Launched video game trade-in program
- Expanding Savings Catcher pilot in seven markets
- Launched online auto insurance comparison service
The point here isn't that all innovative measures are guaranteed successes, but that Wal-Mart is able to consistently find new ways to offer additional service for its customers. . This constantly adds potential for new revenue streams.
As far as e-commerce is concerned, Wal-Mart saw first-quarter double-digit sales growth in the United States, contributing 30 basis points to total U.S. comps sales (down 0.6%.)
Approximately 67% of the e-commerce sales came from Walmart.com, with the remainder coming from store-fulfilled orders. Ecommerce strong points included Home, Hardlines, Toys, Seasonal, and Apparel. The only e-commerce weak point was Electronics.
During the first quarter, Wal-Mart rolled out its e-receipts program, which is expected to further enhance the integration of physical stores with e-commerce by making it easier for customers to keep track of their purchases. Additionally, Wal-Mart just updated its mobile pharmacy app, which according to the company has seen a strong customer response across the country.
The Foolish conclusion
Wal-Mart isn't a fast-growth story, especially compared to Amazon. It's still growing, however. It has also been more consistent on the bottom line while driving free cash flow. This cash flow allows for the growth initiatives listed above. It's a positive cycle, and since Wal-Mart believes in steady profitable growth and capital returns to its shareholders, it should be considered as a long-term investment option.
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.