December Retail Slowdown Not a Concern for Wal-Mart

January 10th, 2011 by Trefis Team
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Wal-Mart (NYSE:WMT) is the largest retailer in the world based on revenues and competes with other retailers like Costco (NASDAQ:COST), Target (NYSE:TGT) and Amazon (NASDAQ:AMZN). Our price estimate for Wal-Mart’s stock stands at $65.42 which is about 20% above the market price.

We estimate that 62% of Wal-Mart’s value comes from its U.S. stores (excluding Sam’s Club brand stores). As the company engages in general retailing, selling almost every kind of merchandise, its value is highly sensitive to the U.S. economy and consumer spending trends.

While consumer confidence is on the rise, indicating a bright outlook, December sales turned out lower than expected for some retailers. Retail chain Target Corp (NYSE:TGT), which offers a similar range of products as Wal-Mart, posted comparable-store sales gains of only 0.9% year-over-year for December 2010, vs. analyst expectations of 4% growth. [1]

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Should investors worry about soft December sales? Probably not.

Reasons for Softness are Temporary

Several reasons have been attributed to less than expected December sales for retailers. Snowstorms in the Northeast slowed the pace of retail activity in late December. Additionally, sales totals also took a hit from heavy discounting  and general consumer shopping fatigue. [1] These are merely temporary roadblocks, however, and the long-term outlook for the retail industry remains governed by widespread economic recovery and employment creation.

December Sales Variability has Minimal Impact on Stock Value

Wal-Mart does not report its monthly sales, however its competitor Target does. Thus Target can be used as a good proxy to estimate the proportion of Wal-Mart’s yearly sales generated in December. Target reported sales of about $9.9 billion for December 2010 to close out full year 2010 total sales of $61.4 billion. [2] This indicates that December accounts for roughly 16% of Target’s total sales. If we assume a similar proportion for Wal-Mart, it would imply that a 10% change in December sales corresponds to a  1.6% change in yearly sales.

How significant is this for the company’s stock value?

You can modify our forecast below to see how a 1.6% change in revenue per square foot figure for Wal-Mart US might impact our price estimate. We estimate the impact of a 10% change in December sales to be less than 1.5% to Wal-Mart’s stock value. Since Target’s miss was only about 3 percentage points, the impact from a possible retail slowdown in December is negligible to Wal-Mart’s stock. The true test for the company will be the trend of retail sales growth in the coming months.

To see the impact of various revenue per square foot estimates for Wal-Mart’s U.S. stores on the company’s stock value, drag the trend line in the modifiable chart above.

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You can see the complete $65.42 Trefis price estimate for Wal-Mart’s stock here.

Notes:
  1. Holiday store sales chilled, cnnmoney.com, Jan 6 2011 [↩] [↩]
  2. Target Reports December Sales Results, Jan 6 2011 [↩]