WMT | 4 REASONS IT'S HORRIBLE FOR RETAIL

Takeaway: WMT’s blow-up is far from over. It’s about as late-cycle as we can fathom, and will absolutely hit those who haven’t proactively prepared.

WMT’s blow-up is far from over. It’s about as late-cycle as we can fathom, and will absolutely hit those who haven’t proactively prepared. Here are a few thoughts…

 

1) WMT set the bar so low with its guidance today that we have to wonder how the rest of retail is not quaking in its boots. The mid-point of the guide implies that earnings will be off 10% this year and another 6-12% in FY 17 AND we won’t see 2015 earnings levels again until at least FY19. If anyone is questioning what end of the economic cycle we’re in, it’s not the end you give a kiss at bedtime. While a struggling WMT is a terrible barometer for all of retail, it’s even more troubling when you consider what WMT is investing in. Wages and Price. That will be a significant headwind on the gross margin and cost side. Any peers (ranging from TGT to CVS to COST to KSS to Albertson’s [winner of “most poorly timed IPO of the decade”]) who think they can sidestep this reality are delusional.

 

2) Wages – by the end of FY17 WMT will have invested $2.7bn or $5,400 per each of its 500,000 eligible US employees. It will account for -4.5% to -9% of EPS change in FY17 or 75% of the aggregate earnings decrease. That type of deleverage for a company like WMT who in the US employs 1.4mm workers and accounts for 16.5% of workers in the Food & Beverage, Health/Personal Care, Clothing, and General Merch categories that’s a game changer. Anyone who has not proactively managed their expense line will have a tough time. It’s a good thing for KSS that it does not have to pay higher wages because it’s employees love to come to work (that statement will come back to haunt CEO Mansell).

 

3) Retail growth expectations are overly bullish.  The chart below says it all…it shows the consensus EPS growth rate for a basket of bellwether names in the retail sector. After bottoming in FY15 (WMT FY16) consensus has numbers accelerating to 10% and 12% in FY16 and FY17 respectively. Compare that to WMT guiding to -10% in its FY16 (calendar ‘15), -9% at the midpoint of the guide in FY17 (calendar ’16), and flat in FY 18 (calendar ’17). Bottom line…either WMT sandbagged, or growth for others will come down. Such a significant gap has not sustained itself for any more than a few quarters.

WMT  |  4 REASONS IT'S HORRIBLE FOR RETAIL - WMT growth B

 

4) Can Someone Find a New Initiative or Buzzword Please? WMT came out today and spent the majority of the time in its prepared remarks talking about two pillars of its business – e-commerce and the US business. There was some talk about logistics which is unique to WMT and it should be because its best in class (at least at the brick and mortar level). But, these are the drivers the company announced at today’s analyst meeting: e-commerce, omni-channel, new apps, buy online pick up in store, new store formats/designs. That’s the same playbook we’ve seen laid out by TGT, KSS, and pretty much everyone else -- you name it. One particularly troubling piece of the puzzle is that WMT management thinks it’s ‘ahead of the curve’. 


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