Soft Guidance But Good Outlook: Why Walmart Is a Buy

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Walmart (NYSE:WMT) is a household name that really does not require any introductions. What you may not be aware of is the recent weakness in the stock. Year to date, the stock is down 5 percent, and in the last month it has been on a steady decline.

Walmart stock tends not to move with volatility, as evidenced by the tight 52-week trading range of $71.51 to $81.37. The stock is now slightly below the midpoint of this range, trading at $75.31. The question is this: Is the recent weakness an opportunity to get long the stock? To help answer this question, a review of the company’s recent performance is warranted to determine if the company is structurally weakening or if the stock is down for other reasons.

Walmart is one of a number of retailers that was impacted by the long winter in its first quarter. But it is one of the companies that is probably correct in assigning blame to the weather compared to other companies employing this excuse. In its first quarter, Walmart saw diluted earnings per share from continuing operations of $1.10, a decrease of 3.5 percent compared to last year’s $1.14.

The severe weather that I mentioned? It hit hard in the U.S. in particular. This negatively impacted earnings per share by approximately 3 cents, according to company estimates. Another issue hurting the company was that the company’s effective tax rate for the quarter was higher than anticipated. Consolidated operating income was $6.2 billion, a decrease of 3.8 percent. Severe weather in the U.S. businesses negatively impacted the company’s profit.

Despite the weather, Walmart managed to increase sales once again. Consolidated net sales rose approximately $0.9 billion, or 0.8 percent, to $114.2 billion. The company pointed out that currency exchange rate fluctuations negatively impacted net sales by approximately $1.6 billion. Excluding currency, net sales would have increased 2.1 percent. Walmart’s comparable sales were relatively flat, as expected, down 8 basis points compared to last year’s quarter.

Severe weather adversely impacted comp sales by approximately 20 basis points. Comp sales for the Neighborhood Market format rose approximately 5 percent. Overall, Walmart U.S. net sales increased $1.3 billion, or 2 percent. Excluding the impact of currency exchange rate fluctuations, Walmart International’s net sales would have increased 3.4 percent to approximately $34 billion.

On a reported basis, net sales were $32.4 billion, a decrease of 1.4 percent. Sam’s Club comp sales (without fuel sales) decreased approximately 0.5 percent. However, Sam’s Club delivered 10.9 percent membership income growth for the quarter. Further, as like most other retailers, e-commerce sales globally increased approximately 27 percent for the quarter.

Given the brutally long winter in the U.S., Walmart’s results are actually impressive. It could have been far worse, in my estimation. I think the shares are on sale. Looking ahead, the company expects second-quarter fiscal year 2015 diluted earnings per share from continuing operations to be between $1.15 and $1.25. This compares to $1.24 last year.

That guidance assumes incremental investments in e-commerce, headwinds from higher health care costs in the U.S., and increased investments in Sam’s Club membership programs. It also expects a full-year effective tax rate to range between 32 and 34 percent. I think the guidance is a little soft. I also expect this to be a case in which Walmart is likely under-promising to over-deliver. Given the stocks earnings, its dividend, and the anticipated growth, I rate shares a buy and assign an $85 price target.

Disclosure: Christopher F. Davis hold no position in Walmart and has no plans to initiate a position in the next 72 hours. He has a buy rating on the stock and an $85 price target.

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