The world’s largest retailer, Wal-Mart (NYSE:WMT) recently reported its Q3 fiscal 2013 earnings with slower growth than the market’s expectations. This can be attributed to tough economic conditions and prevailing high unemployment.  The foreign currency fluctuations also impacted reported revenues from the international segment. We believe that these factors will influence the retailer in the coming quarter as well and it could continue to register slow to moderate growth.
However, the international segment posted solid results driven by market share gains. This segment accounts for 40% of our estimates. Moreover, Wal-Mart is improving its e-commerce channel in the U.S. and abroad, which should help sales going forward. We expect the upcoming holiday season quarter to be quite busy, and Wal-Mart should be one the beneficiaries with its low cost advantage and breadth.
Wal-Mart’s Dependence On U.S. Consumer Spending
The comparable store sales of Wal-Mart U.S. and Sam’s Club were up by 1.5 % and 2.7 % respectively. Although this growth was positive, it was below the retailer’s expectations. Moreover, these reported figures were without the impact of higher fuel prices. This implies that the retailer has had a tough time in the third quarter due to some major macroeconomic factors.
Consumer spending in the U.S. slowed in the latter part of the third quarter, which impacted results. Wal-Mart accounts for about 10% of nonautomotive retail spending in the U.S., and any big change in the consumer spending trends is likely to have an impact on the retailer.
Unemployment & Higher Gasoline Prices In U.S. Weigh On The Retailer
The unemployment rate in the U.S. peaked after the recession in 2008-2009.  Although it has come down since, the figure increased during the month of October to 7.9%. We believe that this had a negative impact on Wal-Mart’s growth in the quarter. However, as the U.S. economy recovers slowly, there will be some modest job gains that could help Wal-Mart’s growth.
International Segment Looks Good
The revenues from the international business increased by 2.4% in the third quarter. However, excluding the currency fluctuation effect, the increase was 7.6%. This increase was mainly driven by an increase in market share in all of the retailer’s markets. With Wal-Mart’s low price advantage, we expect it to further gain market share. Furthermore, the retailer is looking to expand its e-commerce in crucial markets such as the U.K., China and Brazil. It also acquired a major stake in Yihaodian, the China e-commerce retailer. This positions Wal-Mart well in the international market, which contributes about 28% to the retailer’s revenues. The international segment constitutes about 40% of the company’s value according to our estimates.
Our price estimate for Wal-Mart stands at $80, implying a premium of about 10% to the market price.Notes:
- Wal-Mart’s earnings rise 9%, U.S. same store sales up by 1.5%, Proactive Investors, Nov 15 2012 [↩]
- U.S. unemployment up to 7.9% in October, Trading Economics, Nov 2 2012 [↩]