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I have something to admit. I was wrong this week. On Monday I ran through a preview of this week’s earnings reports, and my thought was that Wal-Mart (WMT) would drop in price after it announced earnings this morning.

Well, it turns out that in this market a tepid sales growth increase can lead to a 4% rise in stock price. Wal-Mart is trading higher this morning after announcing that its same-store sales growth rose 0.5% from last year. That’s the first time same-store sales have risen in 7 quarters, and is higher than the 0% growth analysts expected.

The same-stores sales growth was fueled by lower gas prices and success at Wal-Mart’s small stores. The stores, called neighborhood markets, are meant to mimic dollar stores. Wal-Mart has an edge over competitors for these small stores given its large purchasing power and distribution chains, so same-store sales at these stores were up 5.5% over last year.

Earnings per share were $1.15 and revenue was $119 billion for the quarter, vs. analyst expectations of $1.12 earnings per share and $118.35 billion in revenue. The best news for Wal-Mart came from its online sales, which jumped 21%.

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Even though I was wrong on the earnings report results, I stand by my overall thoughts on the stock. I will continue to stay far away from Wal-Mart. While they may have squeaked by this earnings, I don’t think they will be seeing significant growth in their future.

Why do I think that? For one thing, Wal-Mart told me. In this morning’s announcement, Wal-Mart lowered their predictions of how much they will earn this year. They are expecting the holiday shopping season to be “highly competitive” and for the first time will be matching prices of online retailers like Amazon. Wal-Mart is also holding its Black Friday sales for 5 days in an effort to be more competitive.

While these initiatives may boost sales, the discounted prices are likely to hurt profit margins.

On top of that, a memo was leaked by a Wal-Mart employee this week, and it indicated a number of initiatives the company is undertaking to “beef-up” sales of food. Initiatives include rotating near-expired foods to the front of the shelf so they’re more likely to be sold. It seems to me that a company doing well wouldn’t need to send managers memos about how to sell almost expired food.

If you’re looking for a low-risk investment, Wal-Mart may be a decent choice for you. The stock is up 4.75% year to date, has a 2.33% dividend yield, and reacts positively to even slightly good news. However, if you’re looking for a stock that will have strong long-term growth prospects, Wal-Mart is unlikely to provide them.

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Note: I’ve mentioned same-store sales growth a few times in this post and thought I would define the term. Same-store sales are a retail term, used to measure the sales growth in stores opened at least one year. This figure gives a more consistent way to track sales over time by excluding new stores, which may be slow to grow or have a temporary pop in sales when they open.

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1 Comment on Why I’m avoiding Wal-Mart after its 4% jump today

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