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Wal-Mart Gets Back on the Growth Track

E-commerce is helping the retailing giant jump-start stalled revenue and profit growth. And shareholders will benefit.

A rising e-commerce player is growing revenues faster than Amazon.com has in years. It offers free, two-day shipping on orders over $35, along with click-and-pickup grocery service complete with workers to load bags into customer trunks. And it’s publicly traded, with shares that look reasonably priced. It’s Wal-Mart Stores —no, really—and it’s coming up on a pivotal moment for investors

Although Wal-Mart (ticker: WMT) has played in online shopping since 2000, it got a boost a year ago with its $3.3 billion purchase of Jet.com. That deal has padded Wal-Mart’s e-commerce growth over the past year, and more important, it has brought fresh thinking and innovators such as Jet founder Marc Lore, now Wal-Mart’s U.S. e-commerce chief. More recently, there have been a string of tiny acquisitions, experiments, and musings that are out of character for Wal-Mart—in a good way. Some seem out there, like having store employees deliver packages on their way home from work. Others look like slam-dunks, such as the purchase in September of Parcel, an outfit that can provide same-day delivery of general merchandise and groceries in New York City.

Wal-Mart has said it can expand e-commerce revenue 20% to 30% organically even as the lift from the Jet deal fades. Expect it to have more to say on that front this Tuesday at its annual presentation to investors. (Wal-Mart declined to make executives available for comment.) Barron’s recommended the stock early last year (“Wal-Mart’s Turnaround Could Lift Shares 30%,” Feb. 27, 2016). It has returned 25% since then, including dividends, nearly 10 points behind the Standard & Poor’s 500 index. So far this year, though, Wal-Mart stock is running ahead of the market. At a recent 17 times next fiscal year’s projected earnings, and with the company poised to return to its best earnings-per-share growth in five years, the stock could return another 15% or more over the next year.

Wal-Mart rang up $486 billion in sales last fiscal year, more than double that of any other U.S. company. Of that, 64% came from Wal-Mart U.S., 24% from international stores, and 12% from Sam’s Club. Groceries are more than half of U.S. revenue, making Wal-Mart the country’s largest grocer. Analysts say it has been taking market share in groceries at an accelerated rate this year, thanks in part to its online ordering service, which has added more than 400 stores for pickup just this year, bringing the total to more than 1,000. The company, which has stores within 10 minutes of 90% of the U.S. population, is also testing grocery delivery.

Let’s not overstate Wal-Mart’s digital-age swagger. The company doesn’t break out its e-commerce dollars, but before the Jet.com purchase, they were estimated at 3% of total revenue. That figure is surely pushing higher, especially because e-commerce includes online grocery orders. Last quarter, Wal-Mart said e-commerce net sales jumped 60% from a year earlier. That compares with overall revenue growth of 2.1%, or 2.9% without currency swings. But the company is still, overwhelmingly, a brick-and-mortar discounter serving shoppers with average incomes below those of Amazon Prime members.

IN ITS ONLINE BUSINESS, Wal-Mart might be subtly pushing upscale. Earlier this year, the company bought Bonobos, an online clothier to posh, urban males, and ModCloth, a trendy women’s brand. Also this year, Wal-Mart snapped up ShoeBuy.com and Moosejaw, an outdoor clothing seller with an online focus. None of these deals are transformative, but Wal-Mart seems to be using small tuck-in acquisitions to gradually build out its dot-com brainpower, brand perception, and entrepreneurialism.

Last week, Barron’s featured a Q&A with marketing firebrand Scott Galloway, who had likened Wal-Mart’s Jet.com deal to a midlife crisis complete with $3 billion hair plugs, and predicted a big write-down. “I think I was wrong,” he told Barron’s, citing the retailer’s newfound offensive posture. “Wal-Mart has been able to get its mojo back, largely because of this acquisition,” says Galloway. “Was Jet.com a company worth $3 billion? No. Was it worth $3 billion to Wal-Mart? It looks as if it was.”

None of this would matter if business at Wal-Mart’s stores was deteriorating. But same-store sales have increased for 12 straight quarters. Traffic growth has been solid. Adams Funds’ Mark Stoeckle, who owns both Wal-Mart and Amazon (AMZN) shares, says Wal-Mart has recently made its biggest improvement in store layouts in years. Oppenheimer analyst Rupesh Parikh, who initiated coverage of Wal-Mart shares in August with an Outperform rating, tells Barron’s that inventory management has gotten better, produce looks fresher, and money invested in higher pay for workers is paying off in rising satisfaction for both workers and customers.

There’s also potential for Wal-Mart to benefit from the weakness of other retailers. Industrywide, more than 5,000 store closings have been announced since mid-2016.

The consensus forecast has Wal-Mart returning to modest earnings-per-share growth this year after a long stretch of declines and gradually accelerating to reach a double-digit growth rate in three years. Parikh reckons shares will reach $90 in a year, up 13% from a recent $79 and change. The dividend yield is 2.6%. Jefferies analyst Daniel Binder sees shares rising 17% to $93, propelled by accelerating same-store sales growth and rising profit margins, as past investments bear fruit.

How Smartphones Hijack Our Minds

Research suggests that as the brain grows dependent on phone technology, the intellect weakens

So you bought that new iPhone. If you are like the typical owner, you’ll be pulling your phone out and using it some 80 times a day, according to data Apple collects. That means you’ll be consulting the glossy little rectangle nearly 30,000 times over the coming year. Your new phone, like your old one, will become your constant companion and trusty factotum—your teacher, secretary, confessor, guru. The two of you will be inseparable.

The smartphone is unique in the annals of personal technology. We keep the gadget within reach more or less around the clock, and we use it in countless ways, consulting its apps and checking its messages and heeding its alerts scores of times a day. The smartphone has become a repository of the self, recording and dispensing the words, sounds and images that define what we think, what we experience and who we are. In a 2015 Gallup survey, more than half of iPhone owners said that they couldn’t imagine life without the device.

We love our phones for good reasons. It’s hard to imagine another product that has provided so many useful functions in such a handy form. But while our phones offer convenience and diversion, they also breed anxiety. Their extraordinary usefulness gives them an unprecedented hold on our attention and vast influence over our thinking and behavior. So what happens to our minds when we allow a single tool such dominion over our perception and cognition?

Scientists have begun exploring that question—and what they’re discovering is both fascinating and troubling. Not only do our phones shape our thoughts in deep and complicated ways, but the effects persist even when we aren’t using the devices. As the brain grows dependent on the technology, the research suggests, the intellect weakens.

Adrian Ward, a cognitive psychologist and marketing professor at the University of Texas at Austin, has been studying the way smartphones and the internet affect our thoughts and judgments for a decade. In his own work, as well as that of others, he has seen mounting evidence that using a smartphone, or even hearing one ring or vibrate, produces a welter of distractions that makes it harder to concentrate on a difficult problem or job. The division of attention impedes reasoning and performance.

A 2015 Journal of Experimental Psychology study, involving 166 subjects, found that when people’s phones beep or buzz while they’re in the middle of a challenging task, their focus wavers, and their work gets sloppier—whether they check the phone or not. Another 2015 study, which involved 41 iPhone users and appeared in the Journal of Computer-Mediated Communication, showed that when people hear their phone ring but are unable to answer it, their blood pressure spikes, their pulse quickens, and their problem-solving skills decline.

The earlier research didn’t explain whether and how smartphones differ from the many other sources of distraction that crowd our lives. Dr. Ward suspected that our attachment to our phones has grown so intense that their mere presence might diminish our intelligence. Two years ago, he and three colleagues— Kristen Duke and Ayelet Gneezy from the University of California, San Diego, and Disney Research behavioral scientist Maarten Bos —began an ingenious experiment to test his hunch.

The researchers recruited 520 undergraduate students at UCSD and gave them two standard tests of intellectual acuity. One test gauged “available cognitive capacity,” a measure of how fully a person’s mind can focus on a particular task. The second assessed “fluid intelligence,” a person’s ability to interpret and solve an unfamiliar problem. The only variable in the experiment was the location of the subjects’ smartphones. Some of the students were asked to place their phones in front of them on their desks; others were told to stow their phones in their pockets or handbags; still others were required to leave their phones in a different room.

The results were striking. In both tests, the subjects whose phones were in view posted the worst scores, while those who left their phones in a different room did the best. The students who kept their phones in their pockets or bags came out in the middle. As the phone’s proximity increased, brainpower decreased.

In subsequent interviews, nearly all the participants said that their phones hadn’t been a distraction—that they hadn’t even thought about the devices during the experiment. They remained oblivious even as the phones disrupted their focus and thinking.

A second experiment conducted by the researchers produced similar results, while also revealing that the more heavily students relied on their phones in their everyday lives, the greater the cognitive penalty they suffered.

In an April article in the Journal of the Association for Consumer Research, Dr. Ward and his colleagues wrote that the “integration of smartphones into daily life” appears to cause a “brain drain” that can diminish such vital mental skills as “learning, logical reasoning, abstract thought, problem solving, and creativity.” Smartphones have become so entangled with our existence that, even when we’re not peering or pawing at them, they tug at our attention, diverting precious cognitive resources. Just suppressing the desire to check our phone, which we do routinely and subconsciously throughout the day, can debilitate our thinking. The fact that most of us now habitually keep our phones “nearby and in sight,” the researchers noted, only magnifies the mental toll.

Dr. Ward’s findings are consistent with other recently published research. In a similar but smaller 2014 study (involving 47 subjects) in the journal Social Psychology, psychologists at the University of Southern Maine found that people who had their phones in view, albeit turned off, during two demanding tests of attention and cognition made significantly more errors than did a control group whose phones remained out of sight. (The two groups performed about the same on a set of easier tests.)

In another study, published in Applied Cognitive Psychology in April, researchers examined how smartphones affected learning in a lecture class with 160 students at the University of Arkansas at Monticello. They found that students who didn’t bring their phones to the classroom scored a full letter-grade higher on a test of the material presented than those who brought their phones. It didn’t matter whether the students who had their phones used them or not: All of them scored equally poorly. A study of 91 secondary schools in the U.K., published last year in the journal Labour Economics, found that when schools ban smartphones, students’ examination scores go up substantially, with the weakest students benefiting the most.

It isn’t just our reasoning that takes a hit when phones are around. Social skills and relationships seem to suffer as well. Because smartphones serve as constant reminders of all the friends we could be chatting with electronically, they pull at our minds when we’re talking with people in person, leaving our conversations shallower and less satisfying.

In a study conducted at the University of Essex in the U.K., 142 participants were divided into pairs and asked to converse in private for 10 minutes. Half talked with a phone in the room, while half had no phone present. The subjects were then given tests of affinity, trust and empathy. “The mere presence of mobile phones,” the researchers reported in 2013 in the Journal of Social and Personal Relationships, “inhibited the development of interpersonal closeness and trust” and diminished “the extent to which individuals felt empathy and understanding from their partners.” The downsides were strongest when “a personally meaningful topic” was being discussed. The experiment’s results were validated in a subsequent study by Virginia Tech researchers, published in 2016 in the journal Environment and Behavior.

The evidence that our phones can get inside our heads so forcefully is unsettling. It suggests that our thoughts and feelings, far from being sequestered in our skulls, can be skewed by external forces we’re not even aware of.

Scientists have long known that the brain is a monitoring system as well as a thinking system. Its attention is drawn toward any object that is new, intriguing or otherwise striking—that has, in the psychological jargon, “salience.” Media and communications devices, from telephones to TV sets, have always tapped into this instinct. Whether turned on or switched off, they promise an unending supply of information and experiences. By design, they grab and hold our attention in ways natural objects never could.

But even in the history of captivating media, the smartphone stands out. It is an attention magnet unlike any our minds have had to grapple with before. Because the phone is packed with so many forms of information and so many useful and entertaining functions, it acts as what Dr. Ward calls a “supernormal stimulus,” one that can “hijack” attention whenever it is part of our surroundings—which it always is. Imagine combining a mailbox, a newspaper, a TV, a radio, a photo album, a public library and a boisterous party attended by everyone you know, and then compressing them all into a single, small, radiant object. That is what a smartphone represents to us. No wonder we can’t take our minds off it.

The irony of the smartphone is that the qualities we find most appealing—its constant connection to the net, its multiplicity of apps, its responsiveness, its portability—are the very ones that give it such sway over our minds. Phone makers like Apple and Samsung and app writers like Facebook and Google design their products to consume as much of our attention as possible during every one of our waking hours, and we thank them by buying millions of the gadgets and downloading billions of the apps every year.

A quarter-century ago, when we first started going online, we took it on faith that the web would make us smarter: More information would breed sharper thinking. We now know it isn’t that simple. The way a media device is designed and used exerts at least as much influence over our minds as does the information that the device unlocks.

As strange as it might seem, people’s knowledge and understanding may actually dwindle as gadgets grant them easier access to online data stores. In a seminal 2011 study published in Science, a team of researchers—led by the Columbia University psychologist Betsy Sparrow and including the late Harvard memory expert Daniel Wegner —had a group of volunteers read 40 brief, factual statements (such as “The space shuttle Columbia disintegrated during re-entry over Texas in Feb. 2003”) and then type the statements into a computer. Half the people were told that the machine would save what they typed; half were told that the statements would be immediately erased.

Afterward, the researchers asked the subjects to write down as many of the statements as they could remember. Those who believed that the facts had been recorded in the computer demonstrated much weaker recall than those who assumed the facts wouldn’t be stored. Anticipating that information would be readily available in digital form seemed to reduce the mental effort that people made to remember it. The researchers dubbed this phenomenon the “Google effect” and noted its broad implications: “Because search engines are continually available to us, we may often be in a state of not feeling we need to encode the information internally. When we need it, we will look it up.”

Now that our phones have made it so easy to gather information online, our brains are likely offloading even more of the work of remembering to technology. If the only thing at stake were memories of trivial facts, that might not matter. But, as the pioneering psychologist and philosopher William James said in an 1892 lecture, “the art of remembering is the art of thinking.” Only by encoding information in our biological memory can we weave the rich intellectual associations that form the essence of personal knowledge and give rise to critical and conceptual thinking. No matter how much information swirls around us, the less well-stocked our memory, the less we have to think with.

This story has a twist. It turns out that we aren’t very good at distinguishing the knowledge we keep in our heads from the information we find on our phones or computers. As Dr. Wegner and Dr. Ward explained in a 2013 Scientific American article, when people call up information through their devices, they often end up suffering from delusions of intelligence. They feel as though “their own mental capacities” had generated the information, not their devices. “The advent of the ‘information age’ seems to have created a generation of people who feel they know more than ever before,” the scholars concluded, even though “they may know ever less about the world around them.”

That insight sheds light on our society’s current gullibility crisis, in which people are all too quick to credit lies and half-truths spread through social media by Russian agents and other bad actors. If your phone has sapped your powers of discernment, you’ll believe anything it tells you.

Data, the novelist and critic Cynthia Ozick once wrote, is “memory without history.” Her observation points to the problem with allowing smartphones to commandeer our brains. When we constrict our capacity for reasoning and recall or transfer those skills to a gadget, we sacrifice our ability to turn information into knowledge. We get the data but lose the meaning. Upgrading our gadgets won’t solve the problem. We need to give our minds more room to think. And that means putting some distance between ourselves and our phones.

KGI’s Ming-Chi Kuo is today out with a new investor note in which he further analyzes the iPhone X supply chain and production struggles. Kuo also looks ahead to 2018, noting of when Apple will hit full production of the iPhone X as well as what’s in store for the 2018 iPhone…

Kuo says the “true super cycle” for the iPhone won’t actually take place until 2018. While many analysts have predicted that the launch of the iPhone X will prompt a super cycle for the end of 2017, the KGI Securities analyst says supply shortages will push that increased upgrade cycle into next year.

As he’s said in the past, the biggest bottleneck Apple faces in iPhone X production is the front-facing TrueDepth camera that allows for Apple’s Face ID technology. Those issues, however, should be resolved in 2018.

Furthermore, the 2018 iPhones will see a “longer sales period” than the 2017 iPhone X due to the improvements in availability as Apple perfects the production process. This implies that Kuo sees the 2018 iPhone X models being readily available right at launch, as opposed to the significant delays plaguing the current generation.

All in all, Kuo predicts 210 million to 220 million iPhone sales in 2017, while 2018 will see Apple ship between 245 million to 255 million units.

As for the iPhone 8, Kuo says the supply chain sentiment is “more conservative” as of late due in large part to the fact “visibility is still low for new products in 2018.” Once the holiday rush is over, he predicts a sharp quarter-on-quarter decline for iPhone 8 sales due to cannibalization from iPhone X. In the meantime, iPhone 8 Plus sales have been “better than expected” thus far.

Finally, Kuo predicts that 2018 iPhone models will “retain selling points found on the iPhone X.” With this paired alongside improved production, he says he’s optimistic on prospects for iPhone suppliers heading forward.

Kuo has vocalized iPhone X production concerns several times in the past and today’s report does much of the same. He previously lowered his iPhone X predictions from upwards of 45-50 million units down to 40 million units with Apple making under 10k units per day.

Stocks have taken a beating as Catalans vote for independence. But for investors, the situation may not be as bad as it looks.

After a rough past week for Spanish stocks, there’s plenty of talk about staying away from that corner of the global equity markets, as Catalonia edges toward secession.

When might the coast become clear to jump back in? Strategists are buzzing about that, too, as they track the fallout from the Oct. 1 referendum in which Catalans overwhelmingly backed independence.

Spain’s IBEX 35 benchmark lost 1.89% in the new quarter’s first week as tensions grew between the country’s government and Catalonia’s leaders. The decline grew worse at midweek, but the index then pared some losses as media reports suggested the push to secede was slowing a bit.

Still, the wealthy Catalonian region might declare its independence as soon as Oct. 9, when its parliament might meet, despite a Spanish judge’s order blocking the session. Secession would inflict a considerable toll on Spain, because Catalonia accounts for 19% of its gross domestic product, according to the Economist Intelligence Unit.

“I’d be a bit careful with Spanish stocks now,” Angel Talavera, a senior euro-zone economist for Oxford Economics, tells Barron’s. “You’re starting to see a disconnect between Spain and the rest of Europe in the last few weeks.” Talavera, who is based in the United Kingdom but hails from Catalonia, has cut his fourth-quarter IBEX forecast, saying the index will finish roughly flat for the period, down from his earlier prediction of a 3% gain. The IBEX is up about 9% for the year.

“It’s not the right time to go into the IBEX 35 yet,” adds Predrag Dukic, who handles equity trading in Madrid for CM Capital Markets’ international clients. “That would be taking too much risk.” Still, Dukic isn’t throwing in the towel on Spanish stocks. He’s watching for “signs from the central government and from the independence movement that they’re willing to sit down and sort it out.” Adds Dukic: “That would be a signal to perhaps move into the IBEX 35.” It could take a few weeks or months before that green light comes, he reckons.

Talavera isn’t expecting politicians from Madrid and Barcelona to quickly exchange olive branches, but he predicts that Spanish stocks will get their groove back as investors grow accustomed to the tensions. “In terms of an actual solution—progress, moving forward—I don’t see anything happening anytime soon, because the government in Madrid really doesn’t have a lot of appetite to sit down and offer a lot of concessions,” he says. On the other side, the independence movement’s leaders have been pushing hard and don’t appear inclined to negotiate. Spain’s government tried to prevent voting on Oct. 1, but more than 40% of Catalonia’s voters still cast ballots. “Any solution would take years,” Talavera says. “It’s going to be a kind of chronic situation for the next few years.”

Nonetheless, he hasn’t cut his forecasts for Spain’s GDP growth, saying the nation’s economy remains strong and “actual secession is not going to happen.” He estimates that GDP will rise 3.1% this year and 2.7% in 2018, and he sees a 6% gain for the IBEX next year.

“Markets adjust to the level of noise,” he says. “The moment that you understand this is not happening, and you go beyond the headlines, what you’re left with is a problematic political situation, but it doesn’t necessarily derail the economy. People still go to work, still consume, and investment is still going on pretty much as it was before.”

CERTAIN SPANISH STOCKS could hold up better as political machinations continue. CM Capital Markets’ Dukic suggests looking at companies with considerable exposure to other countries, such as the utility Iberdrola (IBE.Spain), and builders Obrascón Huarte Lain (OHL.Spain) and Actividades de Construcción y Servicios (ACS.Spain). Iberdrola gets 46% of its revenue from Spain, while OHL is at 21%, and ACS just 13%, according to FactSet.

On the flip side, both Barcelona-based CaixaBank (CABK.Spain) and Banco de Sabadell (SAB.Spain) could underperform while tensions persist, but then outperform if there’s a broad relief rally, Dukic observes. Other analysts have suggested that those banks are oversold, and due for gains, as last week’s European Trader column noted.

For betting broadly on Spanish stocks, popular U.S.-listed plays include two exchange-traded funds: iShares MSCI Spain Capped (EWP) and iShares Currency Hedged MSCI Spain (HEWP]. They’re up 24% and 13% this year, respectively, after each pulled back last week.

What could prompt more pain for Spanish stocks? A repeat of clashes between national police and Catalans, a move to suspend the region’s autonomy, or a snap general election for Spain all could lead to further selling, Dukic warns. “The market has for a long time brushed aside this issue,” he says, referring to secession. “Some people now realize the situation is more serious than initially thought.”