Wal-Mart (NYSE:WMT) will release its Q1 fiscal 2014 results on May 16. Although the retailer performed steadily throughout fiscal 2013, we expect it to report relatively slow growth for the quarter. Higher payroll taxes and delays in tax refunds will be some of the key factors governing the retailer’s results in the U.S. Additionally, Wal-Mart’s slower expansion in international markets such as Brazil, Mexico and China is likely to weigh on its overall revenue growth. Since the company slowed the pace of expansion to improve its store profitability, we will look to see its impact on comparable sales.
Delay In Tax Refunds And Payroll Tax Increase Will Weigh On The Results
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During its Q4 fiscal 2013 earnings announcement, Wal-Mart stated that its February sales were turning out to be disappointing due to the increased pressure on consumer spending, resulting from delay in tax refunds and payroll tax increases.  The tax refunds were delayed due to year end complications related to the fiscal cliff. Since the IRS delayed the filing process by almost 15 days, refund checks were behind schedule.  As a result, the total tax refund amount for the first two weeks of February decreased by 28%, compared to the same period a year ago.  With less to spend, Wal-Mart’s customers delayed some of their purchases and this could weigh on the retailer’s first quarter results.
Earlier in 2013, payroll taxes in the U.S. increased by 2%, which hurt the lower and middle income segment consumers. Since Wal-Mart’s customers earn between $30,000 – $60,000 a year on an average, most of them fall under these categories.  The tax increase took a chunk out of their earnings, leaving them with less to spend.
Controlled International Expansion Will Mitigate The Revenue Growth
During fiscal years 2008-2012, Wal-Mart expanded aggressively in international markets. Although this resulted in an average annual revenue growth of 10%, revenue per square feet came down from $440 to $409.  Last year, the retailer decided to slow its expansion in markets such as Brazil, Mexico and China, in order to build a strong foundation for comparable store sales growth. This strategy was implemented in the latter half of fiscal 2013 and its impact was immediately visible. Wal-Mart’s revenue growth slowed down as it opened only 500 stores in fiscal 2013, compared to more than 1,000 in the prior fiscal year. We believe that the slowdown in international store expansion will impact the retailer’s revenue growth in Q1 fiscal 2014 as well. Moreover, the change in shopping trends of Chinese buyers (from daily visits to weekly visits) will also have a slight mitigating impact based on management’s comments in past earnings calls. 
However, the slow international expansion can work in Wal-Mart’s favor in the long term. The productivity is improving, and the retailer’s comparable store sales in Brazil jumped by 8% in Q4 fiscal 2013. In addition to this, Mexico’s comparable store sales grew by 2.1% despite a 3% decline in store traffic.  The retailer witnessed a similar trend in China as well. We believe that this can serve as a big positive outcome for Wal-Mart’s Q1 results, which may otherwise remain soft.
Our price estimate for Wal-Mart stands at $80, which is slightly ahead of the market price.Notes: