Stories of Wal-Mart's (NYSE:WMT) poor same-store sales and rising competition in the home market are nothing new for its investors. The media has been flush with articles covering the retailer's woes. But despite the challenges and the negative publicity, Wal-Mart stock didn't fare too badly last year. Compared with SPDR S&P 500's gain of 12% in 2014, Wal-Mart returned 11% to its shareholders -- 9% through price appreciation and 2% through dividends. And there are at least three compelling reasons to believe the stock could fare better in 2015.
Low oil prices and improving economy
With over $470 billion in annual sales, Wal-Mart is a bellwether of the U.S. economy. In other words, macroeconomic trends provide a useful gauge for the retail behemoth's future sales prospects. And current trends suggest that sunnier days could be in store for Wal-Mart.
The Wall Street Journal recently reported that according to its survey of 66 economists, the nation's GDP adjusted for inflation is expected to increase 3% in 2015 compared with the 2.6% they estimated for 2014. The survey also predicts that average hourly earnings could grow 2.2% annually in June 2015 and 2.6% in December, from 1.7% in December 2014. If these predictions come true, it would be the fastest wage growth since the recession.
The dip in oil prices is another big gain for U.S. consumers. U.S. crude oil dipped below $50/barrel in January from around $110/barrel in June 2014. This means Americans can buy gas at less than $2 a gallon at most gas stations in the country. Jim Miel of ACT Research told The Wall Street Journal, "If gasoline prices stay near $2 a gallon for 2015, the economy will see net savings of $750 per household, or just over $90 billion in savings across 124 million U.S. households."
On the back of these trends, Bloomberg Consumer Comfort Index increased to 45.4 in the week ended January 11, from 43.6 in the previous week. This is the highest reading since mid-2007 and signals growing confidence among U.S. consumers. It's likely that Americans will now be more willing to loosen their purse strings, and some of those dollars are sure to end up in Wal-Mart's coffers.
Wal-Mart returns billions of dollars to investors through share buybacks and dividends. In the last five fiscal years, it's paid a whopping $68 billion to its investors. In the current fiscal year ending January 31, 2015, cash returns are nearing $6 billion in the first three quarters. The aggressive cash rewards are likely to continue in the coming quarters as Wal-Mart is in the middle of a $15 billion share buyback program.
Wal-Mart had exhausted its previous approval for a $15 billion share buyback announced in 2011 in just two years. The current program doesn't come with an expiry date, but if management plans to again exhaust the approval within two to three years, there could be a lot of repurchase activity in the coming quarters. This could attract more investors to the stock and raise stock prices.
Wal-Mart has devised some new strategies to grow sales faster. The retailer is focusing on smaller store formats that have become popular in the U.S. Smaller outlets like the Dollar stores are attracting huge traffic as they are convenient to shop at because of their proximity.
Wal-Mart has already had some success with Neighborhood Market stores, which saw year-over-year comps growth of 5.5% in the latest third quarter compared with the overall 0.5% growth for all U.S stores. The company is planning to open 200 small format stores in the fiscal year ending January 31, 2016. This follows approximately 240 store openings in the current fiscal year.
Wal-Mart's also investing heavily in e-commerce -- it has budgeted $1.5 billion for the same in next fiscal year, up 50% from the current fiscal year. According to a study by Forrester Research, online sales in the U.S. could increase at a CAGR of 9.5% from 2013 to 2018, and Wal-Mart wants to be a part of that growth. Instead of focusing on digital alone, the retailer is focusing on omnichannel initiatives like "Buy online and pick up in a store" that can boost sales across channels -- physical and online. Buyers often buy additional items when they visit stores to pick up their online purchases.
Wal-Mart's also making its delivery process better and faster. It's testing a same-day delivery service on more than 5,000 items using its own trucks, which could also boost revenues for the company.
Wal-Mart investors have plenty to look forward to in the coming months. Tailwinds such as low oil prices, improving consumer confidence, and new growth avenues (e-commerce and small format stores) could boost the retailer's sales. Share buybacks and a solid dividend make the stock even more attractive.