Yesterday, Wal-Mart Stores, Inc. WMT let down its investors and surprised the financial markets after the retail giant issued extremely disappointing guidance for fiscal 2017 at its annual investor day.
The dim outlook not only pulled down Wal-Mart’s shares by 10%, it also took along shares of many U.S. stocks and indexes at the close of trading on Wednesday. The decline in Wal-Mart shares dragged down the Dow Jones Industrial Average, accounting for a quarter of the 1% drop in the index.
Shares of rival retailers Home Depot HD and Target Corp. TGT also dropped 1.1% and 3.5%, respectively. Further, this is the biggest drop in Wal-Mart shares in nearly three decades as it washed away billions of dollars of its leading shareholders.
The retailer forecast that its sales in fiscal 2017 would be flat due to stronger-than-anticipated negative impact of the dollar. Wal-Mart had previously forecast sales growth of 1% to 2%. For fiscal 2017, Wal-Mart stated that its earnings could fall by as much as 12% due to higher wages and increased spending on e-commerce activities.
This guidance cut is on top of the lowered earnings outlook for fiscal 2016 as announced during the second quarter fiscal 2016 conference call in August. This signals that Wal-Mart’s challenges are far more serious and likely to persist in the near term.
After decades of robust growth, the retailer has been facing severe challenges since the last few quarters and showing signs of acute weakness. Wal-Mart has been posting disappointing results due to sluggish U.S. sales. It is also facing intense competition on all fronts, ranging from dollar stores to the traditional grocery store chains and online business. Its international operations are also under pressure with a stronger dollar eating into sales.
At the same time, Wal-Mart projects slower growth in new stores. Price competition is one of the reasons for the slower growth, as Wal-Mart is finding it difficult to compete with local grocers in some markets, which compelled it to scale back expansion plans for smaller stores.
Wal-Mart also expects to incur huge e-commerce expenses over the near term. In an effort to compete with the biggest online retailer Amazon.com, Inc. AMZN and to improve customer service, Wal-Mart is aggressively investing in its e-commerce business.
Wal-Mart has also pledged to spend $1.5 billion to raise employees’ wages and give them extra training in fiscal 2017, which has further raised the expense burden of the retailer. We note that Wal-Mart had increased its minimum wage to $9 an hour in April, and expects to increase it to $10 per hour in Feb 2016. Higher labor costs along with the company’s efforts to overhaul its stores and invest in its online operations have weighed on its earnings.
Wal-Mart’s outlook has heightened concerns of investors and retailers, who are already bogged down by the ambiguity over the timing of the rate hike, concerns about the health of the Chinese economy and slowdown in the global markets.
As we step into the third quarter, we expect more reasons to unnerve investors. While China issues will lead the market turmoil across the globe, the persistent weakness in the energy sector, a strengthening dollar and the recent weak retail sales numbers will add to the existing concerns.
Fetching higher returns amid such an investment climate is a Herculean task. However, we have identified four stocks, which not only have strong fundamentals but are also likely to report solid quarterly numbers.
Moreover, the retailers look optimistic with the holiday season around the corner. So it’s better to grab these retail stocks now before they start touching new highs after their results.
4 Prominent Choices
You may bet on eBay Inc. EBAY, which facilitates commerce and payments on behalf of users, merchants and retailers. The stock carries a Zacks Rank #3 (Hold) and has an Earnings ESP of +6.06%. The current Zacks Consensus Estimate for the third quarter of 2015 stands at 33 cents a share. The San Jose, CA-based company delivered an average positive earnings surprise of 7.8% over the trailing four quarters and has a long-term earnings growth rate of 7.21%. The company is slated to report results on Oct 21.
Investors can count on The TJX Companies, Inc. TJX, an off-price apparel and home fashions retailer. The stock holds a Zacks Rank #3 and has an Earnings ESP of +1.19%. The Zacks Consensus Estimate for the third quarter of fiscal 2016 stands at 84 cents a share.
This Massachusetts-based company registered an average positive earnings surprise of 3.29% over the trailing four quarters, and has a long-term earnings growth rate of 11.38%. The company is expected to report results on Nov 17.
We also suggest investing in the nation’s leading discount retailers, Dollar Tree, Inc. DLTR. Based in Virginia, Dollar Tree carries a Zacks Rank #3 and has an Earnings ESP of +1.82%. The Zacks Consensus Estimate for the third quarter of fiscal 2016 stands at 55 cents a share. The stock has a long-term earnings growth rate of 17.2%. The company is expected to report results on Nov 19.
Ohio-based L Brands, Inc. LB can also be an attractive stock for investors. This specialty retailer has a Zacks Rank #3 and an Earnings ESP of +2.08%. The Zacks Consensus Estimate for the third quarter of fiscal 2016 stands at 48 cents a share.
The company registered an average positive earnings surprise of 4.02% over the trailing four quarters, and has a long-term earnings growth rate of 11.63%. The company is expected to report results on Nov 18.
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