Ken Perkins: Wal-Mart's (WMT) shares have fallen by 30% this year, primarily because wage increases and e-commerce investments are weighing on profit growth. With earnings expected to decline 6% to 12% next year, investors are understandably concerned about how much Wal-Mart will need to invest to generate sales growth going forward. These concerns are understandable, but we think many investors underestimate Wal-Mart's ability to compete in e-commerce over the long term.
There are three main considerations that make us like Wal-Mart: First, we think that Wal-Mart has the distribution network and store footprint to fulfill online orders at competitive prices, especially in rural areas where e-commerce economics are less favorable.
Second, investors should invest in companies with more exposure to categories that are hard for e-commerce to penetrate--and Wal-Mart is one of these firms. For example, Wal-Mart generates about 55% of its sales from groceries, and grocery home delivery is likely to remain one of the most expensive categories for e-commerce firms to exploit.
Third, we do not see a deterioration in Wal-Mart's sales trends, despite negative publicity. U.S. traffic and same-store sales continue to increase, especially in categories with high e-commerce penetration, suggesting to us that Wal-Mart's banner remains relevant to many consumers.
The bottom line is that while we think Amazon (AMZN) will continue to take market share going forward, we also believe that Wal-Mart is taking the right steps to defend its economic moat--even if its current investments weigh on near-term cash flow. Overall, we think that long-term investors stand to benefit from owning Wal-Mart shares.