Wal-Mart’s (NYSE:WMT) recently reported fiscal 2013 results showed steady growth. The retailer’s overall revenues increased by 5%, which is similar to the average growth rate that it has witnessed for the last five years.  However, the weak holiday season in the U.S. combined with the payroll tax increase and delay in tax refunds had a negative impact on Wal-Mart’s U.S. results for the fourth quarter. The U.S. comparable store sales increased marginally by 1% in Q4 fiscal 2013 against the retailer’s expectation of 1.5% – 2%.  Nevertheless, with its low price advantage, the company believes that its growth in the U.S. will remain on track in the future. In the international segment, Wal-Mart’s strategy of slower expansion in Mexico, Brazil and China weighed on the results. However, this step was taken to increase the profitability of Wal-Mart’s international stores, which should yield good results over the longer run.
Steady Results From Wal-Mart U.S. For The Fiscal Year
Wal-Mart’s revenue growth in the U.S. has been fairly stable since 2007, averaging around 3% annually. Wal-Mart reported similar results in fiscal 2013 with revenue growth of 3.9%. The retailer attributes this growth to its market share gain in food & consumables, health & wellness and entertainment & toys.  These product categories are top three revenue contributors for Wal-Mart accounting for about 80% of its overall revenues.  However, the fourth quarter revenue growth was slower than the annual growth as Wal-Mart witnessed a weaker than expected holiday season.
Weaker Than Expected Holiday Sales Weighed On Q4 Results
Due to the impact of hurricane Sandy and fiscal cliff concerns, the holiday season in the U.S. was weakest since the economic downturn of 2008.  The company’s management also stated that it saw a sales lull between Thanksgiving and Christmas due to an additional week between these two holidays.  Moreover, the 2% increase in payroll taxes and three weeks delay in tax refunds further added to the issues.  In fiscal 2013, Wal-Mart only cashed in $1.7 billion in tax refund checks compared to about $3 billion a year ago.  These factors along with the increased gasoline prices resulted in slow revenue growth in Q4 fiscal 2013. As opposed to the annual growth of 3.9%, Wal-Mart’s U.S. revenues increased just increased by 2.6% in the fourth quarter.
However, Wal-Mart is confident that it will do well in longer run.  As customers look to the manage a tough economic environment, the retailer’s low price advantage will help it attract shoppers. This will also have a positive impact on Sam’s Club’s memberships.
Amid the weak holiday season, Wal-Mart’s Layaway program helped the retailer to slightly offset the negative impact. Under its Layaway program, Wal-Mart allows customers to buy merchandise with 10% down payment and pay the remaining amount in 60 days. In 2012′s Layaway program, Wal-Mart increased the payment time frame by 30 days, eliminated the cancellation fee and started offering a full refund on the opening fee (fee paid when a customer opens a Layaway account). This helped the retailer report its best ever Black Friday events.
Slow Expansion Plans Impacted The International Results
Wal-Mart’s international segment accounts for about 40% of its value according to our estimates. Since Wal-Mart’s U.S. growth has been steady, its international business has been the major growth driver as emerging markets provide significant scope of expansion due to a huge pool of value conscious customers.
Driven by aggressive expansion, Wal-Mart’s international revenues have increased by an annual average of 10% over the past five years. However, the revenue per square feet declined from $440 in 2007 to $409 in 2011. Last year, Wal-Mart decided to slow down the expansion in some of its key markets such as Brazil and Mexico, in order to build a strong foundation for comparable store sales growth. Furthermore, the retailer also reduced the number of new stores in China scheduled to open in the latter half of fiscal 2013. Its impact was visible in the Wal-Mart’s results as the international revenue growth for the fourth quarter (6.9%) remained below the revenue growth for the entire year (7.4%).
In fiscal 2013, Wal-Mart’s international revenue per square feet remained under pressure due to weak holiday sales in markets such as Japan, Canada and Britain.  Moreover, the store traffic was low in China as more shoppers started visiting weekly.  Wal-Mart’s customers in Brazil & Mexico reduced their shopping basket size. However, we expect the figure to improve over the longer run as the income rises in the emerging markets, shoppers place a greater value on price benefits and Wal-Mart revitalizes its store expansion.
Our price estimate for Wal-Mart stands at $80, implying a premium of about 15% to the market price.
- Wal-Mart’s SEC filings [↩] [↩] [↩]
- Wal-Mart U.S. gains market share, adds $4.7 billion in comp sales for year, Walmart, Feb 21 2013 [↩] [↩]
- U.S. retailers scramble after lackluster holiday sales, Reuters, Dec 27 2012 [↩]
- Wal-Mart profit rises, but outlook dims, USA Today, Feb 21 2013 [↩]
- Wal-Mart, despite profit gain, says rise in payroll tax hindered shoppers, New York Times, Feb 21 2013 [↩] [↩]
- Wal-Mart eases investor’s fears, U.S. shoppers feel pain, Reuters, Feb 21 2013 [↩] [↩]