Shares of Wal-Mart Stores Inc. (WMT, Financial) were trading at a five-year low in late 2015, but that is a past story as things have changed significantly with time. Since then, the stock has gained more than 70% and looks like it will continue inching upward in the coming years. The stock is up nearly 41% year to date.
Wal-Mart reported stunning third-quarter results on Nov. 16. For the quarter, the world’s largest retailer posted earnings per share of $1, 3 cents better than analysts' estimates. Its revenue came in at $123.20 billion, exceeding the consensus by $2.20 billion. Most significantly, that figure represents an increase of 4.2% year over year.
Over the past 12 quarters, the retailer’s revenue growth was range bound between -2% and 2%, but its recent quarter’s revenue growth shows that things are working in favor of Wal-Mart. Moving ahead, same-store sales for its U.S locations surged for the 13th consecutive quarter primarily due to its continuously growing food business.
Another reason for that growth was a boost from consumers stocking up on hurricane supplies. The company’s e-commerce sales surged 50% in the third quarter, down 10% from its previous quarter.
Currently, Wal-Mart has approximately 2 million items that are eligible for free two-day shipping. Although that figure is substantially less compared with Amazon (AMZN, Financial)'s 50 million items, Wal-Mart plans to comprise some of the hottest products heading into the holiday season.
On the other hand, Wal-Mart’s most significant competitive advantage is its physical presence. The retailer is implementing a new strategy by offering same-day, in-store pickup of online orders. It also provides customers with the feature of returning products ordered online at its stores.
Wal-Mart is offering a pickup discount, which means that customers have to pay less if they want their order to be delivered to the stores. The company is taking several steps to save its shipping costs which in turn will positively impact its profitability.
Apart from this, the retailer recently announced that it has partnered with Lord & Taylor to create a new online flagship store for the apparel retailer. The company took this step as it saw its customers searching for high-end items. The retailer is following an effective strategy of acquiring smaller brands, many of them based on fashion.
The retailer has also boosted its earnings guidance for the full year and now expects earnings per share in the range of $4.38 to $4.46.
One thing that currently looks concerning is that the retailer is increasing online prices for several products, notably grocery items. The company believes that this will force the customers to head into its stores and also will enhance profitability. The retailer, however, is making this move heading into holiday season, which seems risky as it could also force consumers to opt for other retailers in the industry.
Summing up
Shares of Wal-Mart surged more than 8% after it reported its third-quarter results, which show that the retailer can grow well in a challenging retail environment. Everything changed for the company after it acquired Jet.com for $3.3 billion a year ago.
The deal raised many eyebrows at that time, but it has proven to be transformative as Marc Lore has been very successful in driving Wal-Mart’s e-commerce growth initiatives.
The company is investing heavily in the digital components of its business which in turn is increasing its operating expenses. However, that does not appear to be a long-term issue as things will certainly change once the retailer gains a strong foothold in the e-commerce market.
Although Wal-Mart currently trades at an all-time high, its impressive rally still has legs. As a result, I would recommend shareholders continue holding the stock to gain more profit in the coming years.
Disclosure: No positions in the stock mentioned in this article.
