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Wal-Mart looks like its turnaround is taking hold, but it still has big hurdles to get over. Source: Mike Mozart, Flickr.
After reaching an all-time high of $90 a share in January, Wal-Mart stock has been on a steady slide lower. Shares sit some 16% lower and took a sharp drop last month after the world's largest retailer missed earnings expectations.
Investments in its workers -- by raising their wages -- and in its e-commerce platform to better compete against Amazon.com took a toll on Wal-Mart last quarter, but with more wage hikes in the works, and the Internet shopping king retaliating against the retailer, investors are right to wonder whether now is the time to buy Wal-Mart's stock.
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No gain without pain
Wal-Mart's "bold new initiative on pay and training for U.S. associates" announced earlier this year promised to raise the minimum wage for employees to $9 per hour in April and to $10 an hour beginning next year. It also "raised the floor and ceiling on pay bands" for employees beyond the entry-level wage, meaning that some half a billion workers got a raise. Additionally, the retailer added some 8,000 new department managers and committed to staffing its checkout registers with more cashiers to ensure a better shopping experience.
The first stages of this $1 billion investment had the effect of swiping $0.02 per share from earnings last quarter.
But now, the next stage is being implemented, as Wal-Mart is said it's raising wages for another 100,000 U.S. employees, including department managers and service-oriented department workers, like those in auto care and electronics. The pay hikes mean wages for these workers will range between $10 an hour to almost $25 in some departments, starting next month.
Investments Wal-Mart is making today in its employees should pay off down the road in a better shopping experience for customers. Source: Patrick Hoesly, Flickr.
While labor unions aren't happy, saying Wal-Mart needs to go even further by implementing a $15 per hour starting wage, investors understand the investments will continue eating away at profits, and the retailer said that for the full year, employee pay and training will lower earnings by as much as $0.20 per share.
Blazing a path through the Internet jungle
Wherever it turns, Wal-Mart increasingly finds itself bumping into Amazon. Understanding the importance e-commerce is going to play in its future, the retailer has been making equallybroad investmentsin its e-commerce platform, hoping they will enhance its performance.
So far, it seems to be paying off. Global e-commerce sales grew 17% this past quarter, far outpacing the 3.5% increase the retailer saw in net sales in the U.S.In fact, it was because of e-commerce that comps were able to get even that high. Wal-Mart said e-commerce sales contributed approximately 20 basis points to its overall comp performance.
But right now, they're coming at a cost: Domestic operating income fell nearly 7%, or $336 million for the quarter, which reduced per-share earnings by another $0.02, and the company anticipates the impact on full-year earnings will be another $0.06 to $0.09 per share.
How much Wal-Mart'snew member program can help boost e-commerce sales is questionable. While the $50 annual fee undercuts Amazon Prime's $99 cost, you're getting free, three-day shipping on thousands of products compared to free, two-day shipping, but Prime members are also eligible for free delivery within hours, in some cases, and free streaming video.
Now, Amazon is upping the ante further by offering same-day delivery in even more cities. The Internet retailer just said the perk will now be available in 14 U.S. cities.
Wal-Mart does have a size and location advantage in that its stores can pull double-duty as distribution centers, but also serve as pick-up locations for its buy online, pick up in-store program. But competing head to head against Amazon will continue to take a toll, and continue to raise costs. Still, mobile traffic to its site doubled for the quarter, and Wal-Mart saw higher conversion rates, or the number of people who actually bought something after visiting the site.
What it means for investors
Much of Wal-Mart's shortfall this past quarter was tied to foreign currency fluctuations. A comparably healthier U.S. economy caused the value of the dollar to rise against global currencies, making the money the retailer earned overseas more expensive to translate back into dollars.
That will continue to be a headwind for Wal-Mart, which is only just beginning to turn around after nearly two years of falling comps. It's posted back-to-back quarters of positive comps growth, but they're anemic at best: Comps were up 0.5% in the fourth quarter of 2014 and 1% in this year's first quarter.
The retail king is at least heading in the right direction, but with its stock trading at 15 times next year's earnings estimates, and its enterprise value going for 17 times free cash flow, Wal-Mart doesn't seem to be a bargain stock, even at these new, lower levels.
The article Is Wal-Mart Inc. Stock a Buy? originally appeared on Fool.com.
Follow Rich Duprey's coverage of all the retailing industry's most important news and developments. Hehas no position in any stocks mentioned. The Motley Fool recommends Amazon.com and Apple. The Motley Fool owns shares of Amazon.com and Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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