Suddenly, Wal-Mart (WMT) became hot again.
That is, its stock was on fire. Shares of the world's largest retailer gained an impressive 8% so far this year compared to a 6% tumble for the Dow Jones Industrial Average. Investors decided to forget Wal-Mart's fundamental problems -- namely, that it has physical stores in too many places globally and wage inflation is building -- and sent the stock higher on the belief it's a safe-haven asset.
Newsflash: Wal-Mart's stock should not be considered a safe-haven investment like in years past. The company's fundamentals are under attack (its very business model), and it should be assessed on that basis rather than thinking it offers a reliable stream of earnings (and stock price appreciation) amidst a world that seems to be falling apart at the seams.
Having said that, the fact that Wal-Mart's stock has been bought aggressively in 2016 meant the company had to deliver a solid fourth quarter and reasonable range of guidance for the first quarter. In my view, the company did not deliver those things, which in large part explains the stock's 5% pullback on Thursday morning.
If you are bullish Wal-Mart as some sort of safe haven, here is a checklist to run through to assess whether staying long the stock is worthwhile following a sluggish fourth quarter.
Wal-Mart U.S. same-store sales
The evidence on how the holiday season panned out for most bricks-and-mortar retailers has been mixed at best. Retail sales data from the government last week came in solid. Macy's (M), Kohl's (KSS) and Nordstrom (JWN) had challenging holiday seasons. Action Alerts PLUS holding Starbucks (SBUX) killed it.
But when it comes to Wal-Mart, it had to beat its U.S. comp guidance of "around 1%" growth to signal its business is on the mend. All of the stars were aligned for Wal-Mart to pull this off: (1) gas prices were plunging; (2) the toy business was hot thanks to Disney's (DIS) Star Wars; (3) food deflation was evident, meaning people could buy more; and (4) the labor market continued to show job growth.
Unfortunately for Wal-Mart, it fell short of its U.S comp guidance. Hence, one has to be concerned about tepid sales growth continuing during 2016 and expense growth being magnified.
Wal-Mart's operating expenses
The only constant in Wal-Mart's results in 2015? Bloated expenses -- due to investments in people and e-commerce -- for a retailer that has a history of being stingy. For the 12 months ended Jan. 31, Wal-Mart's operating expenses surged 3.9% (this is huge for a retailer Wal-Mart's size) while overall sales fell 0.7%. In the fourth quarter, the pace of expense growth quickened to 6.2%.
For Wal-Mart's stock to be buyable, the company has to show that its expense growth is leveling off to an extent. It is essential to the company's model to keep expenses under wraps given the state of its top line.
Wal-Mart did not display this at all. On a media call this morning, execs tried to talk tough on expense discipline. I was not convinced.
Wal-Mart's e-commerce business
A sad thing happened to Wal-Mart's e-commerce business during 2015. Despite investments to make the site easier to use and expand the number of food items offered, global e-commerce sales rose only 12% year over year.
On the third-quarter earnings call, Wal-Mart U.S. CEO Greg Foran pointed out that "e-commerce sales and traffic were softer than we would like -- we'll continue to strive to balance sales growth and profitability." Foran did not expand on his comments on Thursday's media call. The head of Wal-Mart's digital business mentioned the e-commerce business outpaced the market in the U.S. for the year -- not exactly a ringing endorsement.
I have reservations that Wal-Mart will blow people away with its e-commerce results this year. Amazon (AMZN) continues to invest aggressively in lower prices and the expansion of its assortments. With that type of relentlessness from Amazon, it's going to be hard for Wal-Mart to impress online.