Long-term investors in Walmart (NYSE:WMT) are asking this fundamental question after the retail behemoth's dismal earnings report earlier this week: is the world’s largest brick-and-mortar retailer failing in its strategy to grow its online sales?
The company’s latest data suggest that it’s not losing, but it isn't winning either. The pace of growth in online sales fell drastically in the fourth-quarter at Walmart U.S., increasing 23% in the quarter when compared to the same period a year earlier. During the previous three quarters, however, that growth was at least 50%.
Winning more online shoppers is crucial for Walmart, at a time when its biggest e-commerce competitor, Amazon (NASDAQ:AMZN), is gobbling up customers. The world’s largest online retailer captured about half of online spending growth during the holidays.
But it wasn't just decelerating online sales that scared investors. The company also reported record low operating margins for the quarter and delivered a disappointing earnings forecast for the coming fiscal year, sending its share price down 10% on February 20, the biggest one-day decline since 2015.
In its latest earning guidance, the world’s largest retailer expects profit of $4.75 to $5 a share this fiscal year, excluding some items, compared with an average Wall Street estimate of $5.13.
Now the good news
So, that was the ugliest part of the story. If you dig a little deeper, however, you’ll see that the quarter wasn’t as bad as the knee-jerk reaction of investors suggests.
The key metric for any retailer is its comparable store sales, known as “comps” in industry jargon. On that metric, Walmart didn’t disappoint. Rather, it registered 2.6% growth in comps at its U.S. stores during Q4, exceeding Street expectations. This growth number follows a very strong Q3 that saw the best growth on this measure in eight years.
Breaking down the comp figure further also shows a very healthy trend as Walmart's traffic rose 1.6% in the quarter and its average ticket price rose 1.0%. Put simply, these numbers tell us that Walmart was able to convince more people to shop in its stores in the current challenging retail environment and get them to spend more per trip.
Even more encouraging, despite the setback in its online sales during the quarter, management doesn’t expect that this slowdown will persist longer term. The retailer is expecting online sales growth of around 40% in the new financial year, signaling WMT CEO Doug McMillon’s confidence about staging a quick turnaround.
Buy WMT stock on this dip?
I always recommend Walmart stock to long-term investors who want to earn growing dividend income and who don’t panic on any quarterly misses. The company has an impressive track record when it comes to returning cash to its investors.
With the Q4 earnings, Walmart also announced a 2% hike in its dividend payout to $0.52 per share. With this dividend increase, Walmart has raised its payout every year for the past 45 years. With an annual dividend yield of 2.25%, you’ll be getting a solid premium to the S&P's average yield of 1.80% from a steady player; WMT has been one of the best defensive stocks during recessions and economic slowdowns.
Despite a 12% decline since the release of Q4 earning report—shares closed last night at $91.52, down 2.75%—WMT stock is still up more than 28% over the past year. But I think this downward move hasn’t yet run its course and there will be more weakness in WMT stock going forward, especially when market volatility is high and investors are nervous about taking new positions.
As such, I think the best strategy for WMT bulls is to wait on the sidelines until a move into the high-$80s occurs before adding to their existing positions, or making a first time purchase.