Wal-Mart (NYSE:WMT) stock saw a dramatic dip earlier this year. It has been edging toward a 10-year low, but signs are pointing to a turnaround for the retailer.
In this video segment, The Motley Fool's Bill Mann, Bill Barker, and Chris Hill explain why brick-and-mortar stores don't seem to be going anywhere soon. They also discuss how the employee wage increase announced by CEO Doug McMillion earlier this year -- along with the chain's increasing investments in online retailing -- will eventually pay out for the company.
A full transcript follows the video.
This podcast was recorded on Nov. 17, 2015.
Chris Hill: Let's start with Wal-Mart. 3rd quarter profit, higher than expected. And, I'll just start with you, Bill Mann. I'd said, when this earnings season began, that the thing I was the most interested in was the guidance that companies gave for the holiday quarter. And Wal-Mart, pretty upbeat for the holiday quarter.
Bill Mann: I have been a longtime believer in Wal-Mart, and I kinda jumped off the train a few months ago, and I'm now back on that train. And it's not because of the earnings report, it's not even anything that Wal-Mart has done.
It was the announcement that Amazon is going to open a retail store. That tells you that the just-online channel has its limitations. That is signaling that they feel like they have to grow, also giving people choice. In this country now, about 92% of retail sales are still done in stores. It sounds like bricks and mortar are going away, but they aren't. And there is no business that is better situated for that than Wal-Mart.
And, the other thing that Wal-Mart's done, they've got $15 billion right now in online sales, and they've just hired a couple thousand people south of San Francisco, and they're trying to figure out and make their online sales channel better. And so, $485 billion in sales, $15 billion in online, they're gonna figure it out. They've got plenty of money to figure it out.
Hill: Doug McMillon, the CEO, I think he's done a pretty good job of setting expectations, not just for the holiday quarter but for all of 2016. We talk about expectations, and obviously, it's great to have low expectations and then beat them. And I feel like McMillon has done a good job of--
Mann: You're not even saying--
Bill Barker: What do you mean by "he's done a good job setting expectations?" Because the stock is very close to a 52-week low. So, in his work in giving people--
Mann: Like a 10-year low, actually.
Barker: I'm not necessarily disagreeing, but in his work of resetting expectations, the market has decided, "I know what we need to do, sell this stock." So, a lot of investors, perhaps, would like the expectations to be set in a way, if they were already shareholders, where selling the stock was not the response.
Mann: You know what--
Barker: But I think he has given the information, particularly in the meeting, I think, back in October, when the stock just got clobbered -- and it went from $66 to $60, and it's back at $60 today after a good report -- of detailing just how much the impact of the increase in wages for the employees was going to affect profits.
Now, I think there had been some mistranslation prior to that as to what it was going to cost the company, and so he did the numbers, and analysts were saying, "Oh, I get it. Now that you've done the math ... "
Mann: " ... there's more commas in that than I thought there were gonna be."
Barker: So, I think it was a fair way to get the message across, but it came out in a way where the stock got clobbered in one day. That happens with stocks.
Mann: You know, what's so funny with companies and stocks, and I've really been thinking about this a lot, where do stock gains come from? A lot of times, it's when the narrative changes. And for years, Walmart has been a loser stock. It seems like a loser company. And I think that that narrative's about to flip.
Hill: Yeah. I think with McMillon, I think... Look: there are times when a CEO will come out and any analysis we do of what CEO X has to say about that particular business's prospects, you can look at that on occasion and go, "Uh, I really feel like they're looking for all the silver linings they can find."
Mann: Right, right. "I've got a tin lining, and I'm pulling it out."
Hill: Right. I think in the case of Doug McMillon, I think he went a couple steps beyond what he could have been. And I'm sure that he had at least one lieutenant who was saying, "Look, put a little bit of sugar on top of this." And he came out and just said, "No. This is what the pain is going to be, this is what the impact is going to be in terms of the wages, and this is what the impact is going to be of these investments we're making online. And you know what? The next year and a half or so, its not going to look that good. But we feel like we're setting ourselves up for longer."
Mann: Do you suppose, because wage pressure has come from political venues rather than something within the company, the companies get a little bit of a pass? Or, that the managers do?
Barker: Do you think it's as much political pressure as just having to remain competitive? I think there is some wage inflation going on. Once unemployment gets below 6%, you've got to pay up more.
Mann: I totally agree, but I think that the political environment right now may give them a little bit more cover.
Barker: I think it set the stage. It set a bar, and once wages started to go toward $15 in some cities, that became a benchmark that others had to respond to. I think that's true.