Why Did Walmart's Minor Profit Miss Trigger Such a Big Slide?

In this segment from the MarketFoolery podcast, host Chris Hill and Motley Fool Asset Management's Bill Barker try to cut through the fog around the 10% drop Walmart (NYSE: WMT) stock took Tuesday morning after it delivered its fourth-quarter report. Its earnings did in fact rise, and its already-high e-commerce sales grew by 23%. But compared to Q3's 50% online growth, that number looks less impressive. More impactful, though, was the way the company spun its outlook.

A full transcript follows the video.

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This video was recorded on Feb. 20, 2018.

Chris Hill: Walmart shares are down about 10% this morning. I get that Walmart's fourth-quarter profits came in lower than Wall Street analysts were hoping for. On the surface, this quarter didn't look 10% bad to me. The fact that online sales growth is lower, it's still online sales growth, and we've talked before about how, for a long time, e-commerce for Walmart was working off of a very small base. So, any time they would put up, "E-commerce sales up 20%," well, they're working off a small base. They're not working off a small base anymore. So, I think, shame on any Wall Street analyst who thought that Walmart was going to be putting up these huge e-commerce comps quarter after quarter.

Bill Barker: We commented, I think I was here for last quarter's Walmart earnings, and online was up 50% in the third quarter, and it was up 23% year over year this quarter. Those are two very different numbers. Within the larger picture, third quarter Walmart earnings were good, but the stock reacted very positively, and a lot of it had to do with that 50% online number. Today, down almost 10%. Again, solid numbers all around. But what you have is a small part of the company, the online sales, in comparison to the larger part of the company, and it's still growing faster. 23% growth is pretty significant. But it's hard to value the numbers around 50%, 40%, 30%. They're still guiding for 40%.

Here's another part of why the stock is weak today: they're guiding for the year for 40% online growth, which is phenomenal. But what they're saying is, that's going to be back later, that's going to be more in the second half of the year. And there's always a certain amount of skepticism from the, "You know what? We're going to do this good work, but more of it in the second half of the year." That never goes over particularly well. Walmart's stock up 50% in the last year, that embeds a lot of good news. Today's news was good, but not great.

Hill: And I'm glad you're touched on the management comments. That was one of the things in the conference call that I think was clarifying, in this regard, that Doug McMillon, the CEO, who has overseen this growth recently, he spearheaded the Jet.com acquisition, he was pretty cagey when pressed by analysts. And I feel like everybody did their job. The analysts did their job in pressing the CEO. "Give us some specifics." And McMillon, I think, did his job in essentially, to use a sports analogy, pulling a Bill Belichick and essentially saying, "No, I'm not going to give you specifics. If you want to trust that we're going to do this, great. If you're not going to trust that we're going to do this and you want to sell off our stock or downgrade our stock, that's certainly in your purview to do that. But I'm not going to give you the specifics that you want."

Barker: Well, if you're not going to do that, and I think you can credit him with choosing not to do it, but the stock was trading up around 25, 27 times earnings. Which is higher than the market generally, and much higher than Walmart specifically has traded over most of its recent past. Over the last five years, it's averaged a 16 multiple of price-to-earnings. So, you've seen, that 55% stock performance in the last year is not reflected of a 55% growth in earnings or profits or anything like that. It's just, this online business is growing very impressively, still is. But that becomes hard to value. And today, down 9%. The stock was up 6% going into today for the year. It's become a little bit less easy to predict what a big, big company like this will do with its numbers than it used to be, so you're seeing a little bit more volatility just because of that online story evolving.

Bill Barker has no position in any of the stocks mentioned. Chris Hill has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.