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Investment Overview for Wal-Mart (NYSE:WMT)
Below are key drivers of Wal-Mart's value that present opportunities for upside or downside to the current Trefis price estimate for Wal-Mart:
- US Revenue per Square Foot: The average annual revenue per square foot for Wal-Mart U.S. stores stood at $432 in 2009 and declined slightly in 2010 to $425 due to the economic slowdown. The figure remained flat in 2011 and rebounded to $436 in 2012 as the company slowed its expansion and remodeled some of its stores to occupy less space. In 2013, the figure went down slightly to $434 due to weak consumer spending in the U.S. on account of increased taxes, slow job growth, higher healthcare costs and gasoline prices. Going forward, we expect the figure to remain flat this year and gradually improve thereafter to reach $486 by the end of our forecast period. However, there can be an upside of close to 5% if this figure ends up around $515 by the end of our forecast period driven by online growth and smaller store expansion. On the contrary, there can be 5% downside to our price estimate if this figure only increases to $450 due to persistent weak consumer confidence and self-cannibalization.
US Number of Stores: We estimate the number of Wal-Mart stores in the U.S. to grow from about 4,200 in 2013 to about 5,460 by the end of our forecast period primarily driven by the retailer's Express format expansion in urban areas. There can be a downside of approximately 5% to our price estimate if the store count increase to only 5,000 in a situation where the company scales down its small store expansion. However, if the retailer chooses to accelerate its small store expansion taking the store count to around 5,800, there can be 5% upside to our price estimate for Wal-Mart.
U.S. Gross Margins: We estimate that this figure will stay around the current levels of approximately 26.5%. There could be downside of about 5% to our price estimate if rising input costs lead to a decline in margins to about 24% by the end of our forecast period.On the contrary, the retailer keeps leveraging its huge buying power to get discounts from vendors, and margins reach 28%, there can be 5% upside to our price estimate.
- International Revenue per Square Foot: Wal-Mart's international revenue per square feet has come down over the past few years due to weak economic environment in China and low store traffic in Mexico and Brazil. However, we estimate that the average annual revenue per square foot for international Wal-Mart stores will increase over the coming years as the company slows down its expansion to build a solid foundation for comparable store sales growth. We estimate the figure to reach $441 by the end of our forecast period. However, there can be downside of approximately 5% to our price estimate if this figure only increases to $400.
- Number of International Stores: We estimate that Wal-Mart's international store count will increase from about 6,110 in 2013 to about 7,910 by the end of our forecast period. There can be 5% downside to our price estimate if Wal-Mart slows down its international expansion and has only 7,000 stores operational by the end of our forecast period. On the flip side, there can be an upside of about 5% if this figure was to increase to 8,900 in the coming five-six years.
For additional details, select a driver above or select a division from the interactive Trefis split for Wal-Mart at the top of the page.
Wal-Mart is the largest retailer in the world with close to $475 billion in annual revenues and over 10,000 stores worldwide. The company sells goods across almost all merchandise categories including groceries, electronics, appliances, apparel, sporting goods, home furnishing products and drugs, while strictly adhering to its EDLP (everyday low price) strategy. However, it earns more than half of its revenues from groceries.
Wal-Mart operates in three business segments: Walmart U.S., Walmart International and Sam’s Club. Walmart U.S. segment is the largest segment of its business, accounting for approximately 60% of its revenues. Sam's Club is the retailer's warehouse model where it charges its customers an annual membership fee, allowing them to buy products at heavy discounts.
The U.S. segment is the most valuable to the company. Wal-Mart has built a trusted brand with a clear value proposition and has expanded across the U.S., resulting in it becoming the nation's largest retailer.
Wal-Mart U.S. stores are bigger and yield more revenue per unit of retail space
Although Wal-Mart has fewer stores in the U.S. compared to international markets, an average U.S. store is about 2.5 times as big as the international store in terms of retail square footage. As of 2013, square footage per store for Wal-Mart US was 160,000 while that for Wal-Mart International was 56,700. Revenue per square foot for Wal-Mart's U.S. stores in 2012 was higher at $436 versus $404 for Wal-Mart's International stores. Thus, despite being similar in store count, the U.S. segment is more valuable to the company compared to its international segment.
Threat of self-cannibalization due to massive size
Like any retailer, Wal-Mart’s long-term sales and income growth depend largely on the company’s ability to open new stores and expand into new markets. However, due to Wal-Mart’s size, it runs the risk of cannibalizing its own sales figures in the US, thereby effectively competing with itself for market share. The company attributes cannibalization as the reason for a 1.1% decrease of comparable store sales as the company had over-saturated the domestic market with stores.
Improving store productivity and smaller stores in urban markets
Opening more supercenters and large format stores may be difficult for Wal-Mart due to its massive presence in the U.S. The company is therefore focusing efforts on increasing its store productivity. To achieve this, the retailer has been remodeling its stores and converting its discount stores into supercenters. While Wal-Mart’s discount stores offer a wide assortment of general merchandise and a limited variety of food products, its supercenters offer a full-line supermarket and general merchandise. Wal-Mart closed 514 discount stores between 2007 and 2012 and opened 902 new supercenters. During this period, the annual revenue per store increased from $67.3 million to $68.5 million.
Wal-Mart’s executives have indicated that the retailer’s future stores will occupy 8% less space, cost 16% less and will run more efficiently. The retailer’s smaller stores, called Express stores, are one-tenth the size of a typical Wal-Mart supercenter and offer 15,000 items in comparison to 100,000 offered at a supercenter. Although the size is much smaller, Express stores offer day-to-day groceries & general merchandise and are focused on attracting customers who shop regularly for their daily needs. This format can be successful in big cities, which have space constraints and where busy schedules limit many customers from driving to a supercenter.
In fiscal 2013, Wal-Mart opened 76 smaller format stores, including Wal-Mart Express and Neighborhood Markets and planned to add 100 in fiscal 2014. For fiscal 2015, out of 235-265 stores planned, 120-150 are Express stores. The company stated that its Express stores are seeing double digit comparable store sales growth despite weakness in the retail market. This is an encouraging sign for Wal-Mart and will help it continue its growth in the U.S.
Growth of online channel
Online retail is gaining popularity in the U.S. due to growing Internet usage and the proliferation of smartphones and tablets. Forrester forecasts that online sales in the U.S. will grow at a compound annual growth rate of 10% between 2013 to 2017. Wal-Mart expects to remain ahead of the market growth with its improved delivery efficiency and e-commerce investments. The company is looking to integrate its stores and e-commerce channel to provide a seamless shopping experience. It plans to utilize its vast physical presence across the country as an e-commerce fulfillment network. Also, Wal-Mart will soon start offering gift cards and mobile coupons along with the “Scan & Go” service. Its pay-with-cash service, which allows the customers to order online and pay at stores has already been quite successful.
Wal-Mart is looking to reduce its online delivery time to two days or less, and is also testing same-day delivery by leveraging its ship-from-store program. The retailer recently acquired Tasty Labs, OneOps, Inkiru and Torbit to support its online efforts, and is exploring the possibilities for crowd sourcing (delivery via customers) to reduce the expenses related to deliveries. Wal-Mart believes that with these strategies its e-commerce revenues will increase to $13 billion in fiscal 2015, from an expected $10 billion in fiscal 2014.
Focus on social media and technology
Wal-Mart has made strong efforts to become technologically advanced and has leveraged social media in order to reach prospective customers. Its digital technology unit, @WalmartLabs, creates platforms and products around social and mobile commerce. Since its inception, @WalmartLabs has been actively scouting for acquisitions. In November 2011, it acquired Grabble, a maker of point of sale technology that ties in with mobile phones.
Walmart is trying to leverage social media to drive its sales. Recently, it partnered with Facebook and also acquired Kosmix, a social media company to promote its offerings.
Improving store productivity in international markets
Brazil and China have delivered good results for Wal-Mart in the past, but recently their comparable store sales growth has gone down due to a significant decline in store traffic. In Q2 fiscal 2014, the retailer’s comparable store sales in Brazil increased by just 1.1% due to 5.5% decline in store traffic. In China, the store traffic declined by 6.8% as Chinese buyers started making weekly stock-up trips instead of frequent visits.
Last year, Wal-Mart decided to slow down its expansion in Brazil and China, to build a strong foundation for comparable store sales growth and reduce operating expenses. The company is still persisting with this strategy as it plans its capital expenditure at around $11.8 billion – $12.8 billion for fiscal 2015, slightly down from fiscal 2014's $12 billion – $13 billion. Additionally, Wal-Mart is looking to close 50 of its under-performing stores in Brazil and China. These stores contribute about 2% – 3% to their respective regions’ sales and their closure will put a negative pressure on Wal-Mart’s revenues growth. However, new store openings in lucrative regions should offset this impact. Moreover, with fewer under-performing stores, Wal-Mart will be able to reduce its operating expenses in international markets, which have been on a higher side for some time.
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How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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