Thursday, November 13, 2014

* Wal-Mart (WMT) - Troubling Trends May Signal US Consumer is Suffocating

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WMT just announced a sort of "so-so" earnings report in terms of the current quarter but the forward looking guidance was positive and the firm seems to have turned around some grinding issues that have swept through the financial statements for a matter of years now.  That's good.... except that it was based on lower oil (gas) prices...

This is bad (prior to the release today):

WMT Revenue growth has shrunk 75%
WMT Net Income growth has shrunk by ~180%
WMT Inventory Turnover is Shrinking
WMT Receivables as a percent of total sales has risen 80%
WMT Stock repurchases have dropped 75% as the stock hits all-time highs

I want to take a look backwards (so, excluding the most recent report today) and discuss the possibility that things may not be OK with WMT, and that means that things may not be OK with the US consumer which, while GDP and employment have have grown, have seen wages in real-terms decline for the  last seven years.

Further, I want to illustrate, that while the stock is making all-time highs, management has significantly stopped buying back stock and a frighteningly fast pace.

Revenue, 1-Year Growth %
This is a chart of growth, so as long as the bars are positive (which they all are), that means WMT revenue is rising.  But... Take a look at the linear drop in growth over the last two-years, with revenue growth now dropping to levels not seen since 2010.

Provided by Capital Market Laboratories

It’s odd to see shares of a retailer jump 3% on mediocre sales growth, flat earnings and trimmed guidance. But in the case of Wal-Mart Stores WMT +4.39% — which always loves to confound critics — it actually makes sense.

Here’s why. Third quarter results show the company is fixing its problems. And it’s making solid progress with two key elements of its strategy: The roll out of Neighborhood Market stores which are tackling the thorny dollar store competition problem, and the build out of e-commerce.

Source: via Yahoo! Finance Why Wal-Mart's Tepid Sales Growth Is Drawing Cheers

Net Income, 1-Year Growth %
In that same time period as revenue growth has been declining, something else has been declining as well... earnings.  In this time period (~two-years) we have seen WMT earnings grow at ~7% a year to now shrinking at about the same rate.

Provided by Capital Market Laboratories

Dig deeper...

Inventory Turnover vs Receivables
The bars represent WMT inventory turnover (how quickly the firm can sell its inventory).  That trend has been dipping since 2010.  On top of inventory turnover, I have drawn in the firm's receivables per dollar of revenue.  That trend has been increasing, and rather dramatically (~80%).

Before we get too scared, a part of this is a change in what WMT sells (different products) and how they sell it (different credit rules).  But, whatever the changes, WMT is turning its inventory less often, it has more sales sitting in "receivables" rather than "received" and those two phenomena have coincided with a drop in revenue growth and a drop in earnings.

Provided by Capital Market Laboratories

Stock Price vs. Repurchases
While WMT is hardly a portfolio buster, rising just 4% in the last year, and all of that coming from today's earnings release, what we can see is that the stock is at an all-time high and as it has been rising, the firm has reduced stock repurchases by 75%.

Not exactly a confidence inspiring endorsement from the higher-ups.

Provided by Capital Market Laboratories

Here's the thing about WMT -- it isn't a company anymore.  It has sales of approximately half a trillion $USD. It's the largest US employer.  It is, if there ever was one, as a stand alone, a macro indicator in and of itself. Right now it's indicating: The US consumer is suffocating; regardless of stock prices, unemployment and GDP.  Wages are down and that means consumption is down.

This is trade analysis, not a recommendation.

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