The Challenges the New Wal-Mart (WMT) CEO Must Tackle

NEW YORK (TheStreet) -- New Wal-Mart (WMTCEO Doug McMillon has his hands full only three days into the new role. The new chief executive and former head of Wal-Mart's international business assumed the position on Saturday, succeeding president Mike Duke.

The megastore chain, due to report full fourth-quarter results on Feb. 20, issued tempered guidance for the quarter below analyst expectations on Friday. Fourth-quarter earnings are believed to be at the low-end or below a previous range of $1.60 to $1.70 a share. For the full year, earnings are expected at or slightly below the low-end range of $5.11 to $5.21 a share.

Analysts surveyed by Thomson Reuters expect fourth-quarter earnings of $1.62 a share and full-year earnings of $5.14 a share.

Wal-Mart expects slightly negative comparable sales growth for both its namesake store and membership-only Sam's Club. Previous guidance had Wal-Mart with flat comps and Sam's Club with growth as high as 2%.

A short-term reason for lower sales was a winter more severe than normal with several debilitating snow storms causing store closures and disrupted foot traffic.

A problem for the long-term, sales were hampered by a reduction in the government's Supplemental Nutrition Assistance Program (SNAP), more commonly referred to as food stamps, which went into effect Nov. 1. The reduction was tied to the expiration of a temporary increase in benefits passed in 2009 as part of economic stimulus efforts.

"The sales impact from the reduction in SNAP ... is greater than we expected," explained Wal-Mart CFO Charles Holley in a statement Friday.

Another ball in the air, The Wall Street Journal reports Monday that Wal-Mart has informed the National Labor Relations Board (NLRB) it was legally allowed to discipline workers for participation in short strikes. The retailer argued non-traditional short strikes could not be distinguished from absenteeism and employees could be dealt with accordingly.

Over the past 24 months, more than 100 employees have walked off the job in protest only to return as normal for their next shift. Two weeks ago, the Labor Relations Board filed a complaint against Wal-Mart for its disciplinary action against workers involved in these short-spurt protests.

But it isn't just problems on Wal-Mart's home turf that the new CEO needs to contend with. The company said international headwinds out of Brazil and China will likely impact fourth-quarter results, too.

In the January-ended quarter, the retailer expects to absorb a 6-cents-a-share hit to earnings resulting from 50 store closures in Brazil and China. Additionally, non-income tax contingencies in Brazil will lower the bottom line by 6 cents a share, while employment claim contingencies will cut it by 5 cents a share. In China, store lease expense charges will diminish profit by 3 cents a share.

Last week, McMillon received a vote of confidence before he had even assumed the top job. Credit Suisse analyst Michael Exstein upgraded the stock on the view the new CEO could "alter WMT's long-term strategies, rather than focusing on repairing short-term issues."

One long-term strategy Wal-Mart is already planning to introduce is a series of "Neighborhood Market" stores, small-store formats with a focus on general merchandise rather than an everything-in-one-place style. Wal-Mart currently operates around 300 of these stores and plans to introduce several hundred more.

TheStreet Ratings team rates WAL-MART STORES INC as a Buy with a ratings score of A-. The team has this to say about their recommendation:

"We rate WAL-MART STORES INC (WMT) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, notable return on equity, growth in earnings per share, increase in net income and increase in stock price during the past year. We feel these strengths outweigh the fact that the company shows weak operating cash flow."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • WMT's revenue growth has slightly outpaced the industry average of 6.3%. Since the same quarter one year prior, revenues slightly increased by 1.6%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.
  • WAL-MART STORES INC has improved earnings per share by 6.5% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, WAL-MART STORES INC increased its bottom line by earning $5.01 versus $4.55 in the prior year. This year, the market expects an improvement in earnings ($5.17 versus $5.01).
  • The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. Compared to other companies in the Food & Staples Retailing industry and the overall market, WAL-MART STORES INC's return on equity exceeds that of both the industry average and the S&P 500.
  • The net income growth from the same quarter one year ago has exceeded that of the Food & Staples Retailing industry average, but is less than that of the S&P 500. The net income increased by 2.8% when compared to the same quarter one year prior, going from $3,635.00 million to $3,738.00 million.
  • The stock price has risen over the past year, but, despite its earnings growth and some other positive factors, it has underperformed the S&P 500 so far. Turning our attention to the future direction of the stock, it goes without saying that even the best stocks can fall in an overall down market. However, in any other environment, this stock still has good upside potential despite the fact that it has already risen in the past year.

More from Markets

To Win at Trade the U.S. Must Act and Behave Like China

To Win at Trade the U.S. Must Act and Behave Like China

Dow Rises Sharply as U.S.-China Trade Tensions Thaw

Dow Rises Sharply as U.S.-China Trade Tensions Thaw

Video: Jim Cramer on Tariffs, the Market Rally, Caterpillar and Micron

Video: Jim Cramer on Tariffs, the Market Rally, Caterpillar and Micron

Apple Shares Gain as U.S. and China Call Off Trade War, For Now

Apple Shares Gain as U.S. and China Call Off Trade War, For Now

GE Confirms $11.1 Billion Transportation Merger With Wabtec

GE Confirms $11.1 Billion Transportation Merger With Wabtec