This Retailer Has More Upside Than You Think

By Sandeep Gupta - September 14, 2012 | Tickers: AMZN, DG, DLTR, WMT | 0 Comments

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Wal-Mart (NYSE: WMT), despite being widely considered as one of the most stable, low beta companies, has significantly outperformed the broader markets in 2012 and the stock has seen a tremendous 23% year to date run up as compared to S&P 500’s 11% gain. As a result, the company is trading near its all-time high. After such a strong performance this year, there are concerns that a further upside might be limited. However, I don’t think the company is likely to disappoint in the near-future given strong growth drivers in E-commerce business, upcoming layaway program, and better advertisement in the United States (with shopping cart comparisons). The company strong financial positions and shareholder friendly activities should further provide support to the stock.

Improved and Extended Layaway Program

Last year, millions of Americans relied on layaway at Wal-Mart to provide a great Christmas for their families. Wal-Mart was the number one Christmas shopping destination followed by Amazon.com (NASDAQ: AMZN). Although, there are concerns that Amazon could overtake Amazon this Christmas, I am not overly concerned as Wal-Mart is taking appropriate measures to negate this threat. Following success last year, Wal-Mart is set to begin its layaway program a month early. The program will be available nationwide from 16^th September (started on 17^th October last year) to 14^th December, which is 30 days longer than last year and will provide customers two additional pay cycles, to pay for their purchase. Additional enhancements include broadening the eligible categories to include small home appliances and select sporting goods, offering a completely refundable open fee (in the form of a WMT gift card) and zero cancellation fees.

Growth Drivers in E-commerce & Mobile

Amazon has taken on and beaten much of the retail world. But it won’t be easy when it comes to beating the biggest retailer of them all as Wal-Mart continues to invest for future growth in e-commerce with many (at least 7) global ecommerce investments/acquisitions over the past 18 months. The company also recently launched a unique “Pay with Cash” program which makes Walmart.com the only place where you can shop online, and pay by cash.  Thus, by managing efficient online operations accompanied by nearby stores the company can penetrate this untapped segment of potential online shoppers and reduce the threat posed by Amazon and other online retailers. Additionally, Wal-Mart is participating in the newly created MCX (Merchant Customer Exchange) which is developing an integrated mobile-commerce platform for retailers.

Gaming up to Beat Dollar Stores

Wal-Mart's U.S. business has been chipped away by dollar stores like Dollar General (NYSE: DG) and Dollar Tree (NASDAQ: DLTR), which have cleverly maneuvered the post-recession economy. Over the last five years, Wal-Mart’s annum growth rate of 9.73% has been far below Dollar General’s 65.21% and Dollar Tree’s 34.33%. However, Wal-Mart is gaming up to beat dollar stores. Wal-Mart has stepped up direct pricing comparison TV advertising and the company is likely to continue this strategy in the coming holidays. Increasing focus on $1 (or below) offerings suggest that Wal-Mart is trying to compete with the dollar channel, and I expect the advertising strategy to remain as widespread as it was a year ago (when it doubled impressions during the holidays). Given the success enjoyed by dollar channel, I think it is a good strategy to fend off competition from dollar stores.

SG&A Savings Opportunity

Wal-Mart’s intense focus on the “productivity loop” could support upside to its 5 year goal of reducing its SG&A ratio by 100 bps. I am impressed by the various initiatives including improved staffing plans (monitoring units/labor hour vs. scans per labor hour), implementation of the “one-touch” program with pre-packed palettes supporting significant labor savings and creation of global shared services. All these initiatives will drive significant SG&A (as well as COGS) savings opportunities.

Shareholder Friendly activities provide support

Wal-Mart has been a consistent dividend provider. The company has raised its dividend every year since 1976 and the dividend yield currently stands at 2.20%. Over the last five years, the company has increased its dividend by ~10.85% annually. Moreover, Wal-Mart has also repurchased approximately 2.70% of its shares outstanding each year over the past decade. In the last quarter, the company bought back $3.42 billion of stocks and I expect the trend to continue in the coming quarters as the company still needs to acquire shares worth $7.9 billion (from its $15 billion buyback program). These shareholder friendly activities will provide some support to the stock.

To conclude, Wal-Mart remains one of the most dependable companies to invest in given its “recession proof” characteristics. Given the latest developments in eCommerce and mobile-commerce, I feel the threat posed by online retailers is overblown. Moreover, I see the potential for continued same-store sales growth in the coming quarters as the consumer responds by visiting the stores more often given the extended layaway program and dollar offerings. Thus, I anticipate a further upside from the current level and recommend buying it.

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