Jeff Reeves's Strength in Numbers: 7 reasons investors should believe Wal-Mart’s comeback is for real

The planned name change at Wal-Mart Stores Inc. — dropping the “stores” after 47 years to become simply Walmart Inc. — is a telling sign about how stores fit in its brand.

Everyone knows that traditional retail names like Sears Holdings SHLD, +6.76% and J.C. Penney JCP, -2.10%  are in trouble. Both these names have plunged more than 60% in last 12 months, vs. a roughly 20% rally for the S&P 500 SPX, +0.29% in the same period.

Meanwhile, Amazon.com AMZN, +0.65% set a fresh record for online sales with a haul of nearly $6.6 billion on Cyber Monday, without nary a brick-and-mortar store to fuel its success.

But don’t make the mistake of thinking all traditional retailers — particularly Wal-Mart WMT, +0.01%  — are doomed. In fact, Wal-Mart stock has been on a tear in the last 12 months, surging more than 35%.

This may be surprising to some, given the past few years of struggles at the megastore. The stock was largely left out of the recovery rally of 2009 and 2010, as its low-income customer base was the hardest hit by the Great Recession. It eventually recovered, only to slump about 30% in 2015 to log its worst year since 1974 on increased costs thanks to a wage increase for rank-and-file employees, overexpansion abroad, a disappointing earnings outlook and general negativity thanks to the rise of Amazon.

The $1 million question is whether this latest comeback can last. After a troubled history with plenty of underperformance and with serious headwinds for big box stores, can investors really trust the stock’s rally?

I think they can — and here are seven reasons why:

Reliable appreciation: The sharp rise lately is not a fad. The stock is up an amazing 50% from its January lows, climbing in almost a straight line, and recently set a new all-time high. Furthermore, a look at the last 24 months shows a surge of almost 65% since December 2015 vs. just 25% or so for the S&P in the same period. Wal-Mart stock has been surprisingly consistent across the last two years, and that should give investors confidence in the trend.

Leaner and more focused: Historically, Wal-Mart grew by building new stores. Now growth is mostly through better same-store comparables and e-commerce. As such, capital spending is projected to be about $11.0 billion in fiscal year 2018, according to last year’s annual report, with the bulk focused on technology, logistics and store remodels instead of store openings as in prior years. Furthermore, that total is down from $11.5 billion in 2016 and $12.2 billion in 2015. This trend shows more discipline on spending, and margins have moved slowly but steadily higher as a result over the past few fiscal years.

Return of capital: While Wal-Mart is being a bit more tightfisted in its expansion plans, it is very generous when it comes to finding money for its shareholders. In fiscal 2017, the company returned $14.5 billion to shareholders through dividends and share repurchases. Longer term, the company has returned $58 billion to shareholders through dividends and buybacks over the previous five fiscal years. That includes 44 years of consecutive increases in dividends, with a payout that has surged more than 130% in the last 10 years from 22 cents to 51 cents quarterly.

No e-commerce slouch: While Amazon is the undisputed leader in U.S. e-commerce sales, with nearly $200 billion in online sales, according to research firm eMarketer, Wal-Mart is pacing over $16 billion in online sales this year with a brisk growth rate of about 47%. Taking a page out of Amazon’s book, it also offers free two-day shipping for orders over $35, and has made big investments in the “smart cart” technology born out of its 2016 acquisition of e-commerce portal Jet that should help suggest add-on purchases to customers before they check out. While brick and mortar remains the driver of this company, it is clearly serious about being a player in online retail.

Read: Amazon’s apparel business could grow to as much as $85 billion in sales by 2020

International potential: In previous years, investors rightly criticized Walmart for a lack of focus via its foreign expansions. But after streamlining operations in troubled markets, including the closure of 60 stores in Brazil last year, Walmart International is back on track. In fiscal 2017, the company posted solid results when you back out currency adjustments; net sales were up on a constant currency basis and 10 of 11 international markets posted sales expansion — including a brisk 7% growth rate in its Walmex business in Mexico and Central America that boasts some 3,000 total stores across the region when you include supermarkets, Walmart supercenters and smaller discount bodegas. Throw in an ambitious partnership with fast-growing Chinese e-commerce site JD.com, and it’s clear there’s more to the stock than simply domestic Supercenter sales.

Moving the brand upscale: After suffering steady sales declines during the Great Recession, Wal-Mart has learned that simply having the cheapest products isn’t enough. Execs have since moved to reposition that brand around quality and not just price. One example is a push into ready-to-cook meal kits similar to those offered by Blue Apron APRN, +1.07%  and other fancy foodie brands. Walmart.com is now offering about 30 meal-kit options that feature sophisticated flavors like pho noodle soup or chicken tikka masala — hardly the flavors you’d pick to target low-income, Midwestern palates. Another interesting move has been a recent partnership to sell high-end apparel from Lord & Taylor on its website. It will take more moves like this to boost margins, and time will tell if customers will come, but clearly execs are moving in the right direction.

Consumer tailwind: All this points to a well-run company that has its priorities straight as it enters 2018. But adding fuel to the fire is a very strong cyclical tailwind for the American consumer that is sure to benefit Wal-Mart and similar companies. Consumer confidence just hit a 17-year high, the labor market remains robust and a soaring stock market is adding to the “wealth effect” in U.S. households. If you’re going to bet against an industry right now, I sure wouldn’t pick one that is so closely tied to the thriving American consumer.

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