That's what the Walmart (WMT) story is. Walmart is interesting. Hitting on all cylinders? Not exactly. Executing well, as the firm navigates an ever more complicated environment? Yes, I think I'll go with that as my narrative. I have always liked Walmart. Still do. Worked there at night years ago to help make ends meet. Have always loved the freedom that such a large store allows for one to watch. Watch the people shop. Watch how they react to price tags. Measure parking lot usage versus capacity. Measure shopping cart usage versus capacity. In fact, I used to conduct my own version of the CPI when I was much younger, and the prices I used for that ill-fated index largely came from the shelves of my local Walmart stores. Eccentric? Guilty. Could I be good at this job if I was not?
Walmart is actually mildly cheap. The stock comes in trading at 20 times forward looking earnings. That's with the Consumer Discretionary sector trading at 21 times, and the broader market trading at 16.5 times. Than again, Walmart is Walmart, and is transitioning into a more competitive e-tailer all of the time, so maybe the firm is worthy of a slightly higher multiple despite the massive overhead. Massive overhead that in turn provides massive scale. Perhaps we'll call that a trade war discount.
Walmart reported adjusted EPS of $1.13 for the firm's first quarter, easily beating expectations. Revenue printed below consensus, still growing 1% year over year. The eye catching statistics are this... Comp transactions increased 1.1%. This is mildly disappointing. However, comp sales increased 3.4%, which is quite robust, and better than the rest of the retail space in broad terms. That was due to a comp ticket that grew 2.3%, better than expected. That ticket number also suggests some power over pricing at the point of sale. That will not be lost on Walmart management as the current trade condition with China is navigated, and the firm communicated this point today (Thursday morning).
One item that will draw negative attention is free cash flow. This number printed at $1.358 billion, a 60% decline. Between CapEx that was necessary in order to evolve the business, and better compete for the modern consumer, while paying a slightly higher wage across the board to the firm's labor force. Not to mention the 2.1% dividend yield. The firm returned $3.7 billion to shareholders for the quarter including those payments as well as the firm's repurchase program.
Perhaps the most impressive line-item that I notice here is the growth in e-commerce sales. Very impressive at 37% (supported by a very efficient grocery operation) on top of last quarter's monster 43%.
I am long this name. My plan was to add on any weakness based on a negative impact from the condition on trade relations. Obviously, even thought I am left with a smaller position, I find this morning's developments more palatable.
What you see here is the share price knocking at the door of resistance. Long base period of consolidation? Sure. Even longer if one can mentally omit the December melt-down. So, for me to add to my long anytime soon, I need to see a take, and hold of that upper blue line. Looks, like the take part is in action right now.
Sarge's Walmart Plan (minimal lots)
Long the stock at an average of $98.60.
Target Price: $127
- Sell WMT one July $97.50 put (value: $0.83) to get my net basis below $98
- Sell WMT one January 2020 $82.50 put (value: $1.00) because I don't think it will get there, and $100 is $100. On top of that, knocks another buck off of my net basis.