Is It Time to Invest in Wal-Mart?
Jun 8th 2012 11:55AM
Updated Jun 8th 2012 4:16PM
Wal-Mart (NYS: WMT) recently saw its first-quarter profits rise by 9% as its top line surged. As fellow Fool Alyce Lomax points out, one area which investors particularly watched was the retailer's U.S. operations, which have seen more downs than ups in the last few years. Wal-Mart's U.S. same-store sales, in fact, rose by 2.6%. However, despite what appeared to be a strong quarterly showing, Alyce said that she'd stay away from the stock primarily because of the bribery scandal surrounding the company's Mexican business.
Scandals aside, in this article I'd like to take a closer look at the company from an operational standpoint. To do so, I'd like to see how the retailer fares when stacked against its peers based on a few key retail metrics.
Growth at the top
The first metric I'd like to look at is sales growth. The company's revenue went up by 8.5% in its most recent quarter, helped by overall same-store sales rising by 4.8%. Same-store sales are important to consider when gauging the performance of a retailer as it reflects the sales at those stores which have been open for more than a year. Peer Costco (NAS: COST) saw its third-quarter profits rise by 19%, which was helped by a 5% increase in same-store sales. Target (NYS: TGT) , which posted higher-than-expected profits this quarter, was helped by a 5.3% rise in its same-store sales as well. It's evident that on this front Wal-Mart performed more or less in line with its peers.
Next, let's take a look at sales per square foot, which will help us understand how efficiently management is using a store's space to generate revenue. Wal-Mart's sales per square foot stood at $425 in 2011 and have risen to $428 in the 2012.
Wal-Mart's gross margin remained more or less unchanged at 25% from the year-ago quarter as the company tried to balance the rise in costs of goods through higher sales. This is a common trend for retailers at present. Peer Target's gross margin has remained at 31% and Costco's stands at 12% in the same time frame. So again, Wal-Mart has performed in line with industry peers.
When we look at sales, we must also consider the growth of a company's inventory as well. If inventory growth is faster than revenue growth, it could imply that the company may face difficulties in selling its products in the future. This could lead to a loss in revenue as the company may then be compelled to sell the product at a lower price. Wal-Mart's inventory growth this quarter was 7.7%, and we've seen that revenue grew by 8.5%. It appears as though the retailer is doing a good job in managing its inventory.
The price we pay
Finally, if we are looking at buying a stock, it helps to look at the price-to-earnings ratio, which basically tells us how much we as investors have to pay for every dollar of the company's trailing earnings. Wal-Mart's P/E stands at 14.2, whereas those of Target and Costco stand at 13.3 and 24.5, respectively. The broader industry's P/E stands at 23.53, so anything less than that can be viewed as a bargain -- which is where Wal-Mart falls.
Wal-Mart looks like a pretty good stock at the moment. But, with scandal shrouding the company, investors may be tempted to stay away from the Bentonville behemoth. Plus, a number of shareholders are suing the retailer, which doesn't really help either.
There are other retailers out there that aren't mired with bribery scandals, have huge growth potential ahead of them, and remain undiscovered by Wall-Street. We've named one such company The Motley Fool's Top Stock for 2012. Learn more about this top pick by clicking here.
At the time this
article was published Fool contributor Shubh Datta doesn't own any shares in the companies mentioned above. The Motley Fool owns shares of Costco Wholesale. Motley Fool newsletter services have recommended buying shares of Costco Wholesale. Motley Fool newsletter services have recommended creating a diagonal call position in Wal-Mart Stores. The Motley Fool has a disclosure policy.
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