As expected, Wal-Mart‘s (NYSE:WMT) Q1 fiscal 2014 results were disappointing as its U.S. comparable store sales (CSS) declined by 1.4%. This can be mainly attributed to weak consumer spending during the quarter due to the payroll tax increase and delayed tax refunds. Also, the unusually long winter impacted sales of weather-sensitive products. However, there were some underlying positives for the retailer, including steady growth in the international business and a firm control over operating expenses. Wal-Mart gained share in most of its international markets and grew its operating income in the U.S. by almost 6%. We expect the retailer’s growth to pick up in the future driven by its focus on improving store traffic, e-commerce growth, and controlled international expansion.
Summary Of Q1 Performance
Wal-Mart’s U.S. comparable store sales fell by 1.4% primarily due to a 1.8% decline in store traffic. The main reasons were the delay in tax refunds, a 2% payroll tax increase, prolonged cold weather and a lower-than-expected increase in grocery prices.  Tax refunds this year were delayed due to the year-end complications related to the fiscal cliff. As the IRS delayed the filing process by 15 days, refund checks came later than usual. 
According to the IRS, U.S. consumers received as much as $9 billion less in tax refunds this year.  The 2% payroll tax increase earlier this year has particularly hurt Wal-Mart’s low income segment customers.
According to the company, lower sales of warm-weather related items such as outdoor furniture, sporting goods and spring clothing also had a part to play in the comparable store sales decline.  Also, Wal-Mart’s management stated that the price inflation of grocery items, which contribute more than 50% to the retailer’s revenues, was lower than expected. 
While the results were disappointing, there were some underlying positives:
Steady Growth In International Business: Wal-Mart stated that despite its slow expansion strategy, it continued gaining market share in major international markets such as the U.K, China and Brazil driven by strong e-commerce growth.  Moreover, the retailer’s stores in China, Argentina, Chile, Central America, Africa and Mexico generated positive comparable store sales growth. Overall, revenues from Wal-Mart’s international business increased by 5.4% during the quarter. 
Control Over Operating Expenses: During Q1 fiscal 2014, Wal-Mart maintained strong control over its operating expenses. It is evident from the fact that its consolidated operating expenses as a percentage of net sales remained roughly flat despite just 1% growth in revenues and a staggering 44.4% ($200 million) rise in corporate and support expenses. 
The company offered lower incentives and maintained tight control over its distribution and transportation expenses. With the logistics team’s firm focus on improving the supply chain efficiency, the retailer was able to transport 3.1% additional cases per mile for similar costs compared to last year.  Moreover, the retailer’s work assignment projects such as MyGuide and OneTouch have helped it in effective handling and movement of merchandise. MyGuide is designed to keep track of Wal-Mart’s employees’ time spent on each task. As a result of these initiatives, cases handled per hour increased by 3% in the quarter. 
What Will Complement Comparable Store Sales Growth In Future?
Wal-Mart’s management stated it is encouraged by the start of second quarter as the weather is getting better and the impact of delayed tax refunds is fading. In addition to these factors, Wal-Mart is making efforts to improve its comparable store sales growth.
Efforts To Attract Customers: As Wal-Mart’s customers remain cautious about their spending, the retailer is offering less expensive products in smaller packets.  Recently, Wal-Mart came out with plans to place lockers in its stores, where customers can pick up products ordered online.
During the first quarter, the company continued testing its mobile self service checkout system “Scan & Go”, which allows customers to check out conveniently.  By the end of Q1 fiscal 2013, 38% of Wal-Mart’s stores had this service installed and the customer response was encouraging.
Additionally, Wal-Mart is rigorously monitoring a number of metrics such as customer line lengths, customer experience scores, and merchandise in-stock levels to devise relevant strategies and ensure smooth operations. With improvement in the process of culling and handling, the retailer places the most freshest product assortments in its stores. 
E-Commerce Growth: Online retail is gaining popularity in the U.S. due to growing Internet usage and the proliferation of smart phones and tablets. Forrester forecasts that online sales in the U.S. will grow 13% to $262 billion in 2013 and reach $370 billion by 2017.  Although Wal-Mart does not report its e-commerce revenues, Internet Retailer estimated its online sales to be around $4.9 billion in 2011.  This implies that the retailer’s e-commerce sales just account for 1% of its overall revenues.
It’s quite clear that the channel provides incredible growth opportunity for Wal-Mart. 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.
In international markets, the company has witnessed a substantial rise in e-commerce revenues. For instance, the retailer’s online sales in Brazil increased by 40% in Q1 fiscal 2014. Interestingly, walmart.com.br has become the largest e-commerce traffic site in the region over the past six months. 
Controlled International Expansion: Last year, Wal-Mart decided to alter its expansion plans in regions such as Mexico, Brazil and China in order to build a strong foundation of comparable store sales growth. The impact was immediately visible as CSS growth in Brazil jumped to 8% in Q4 fiscal 2013 and Mexico’s CSS increased by 2.1% despite a 3% decline in store traffic.  This trend continued in this quarter as well with Brazil, Mexico and China’s CSS rising by 3.7%, 1.1% and 1% respectively. What’s interesting here is that these regions generated positive growth despite a substantial traffic decline and foreign currency fluctuations. This is a big positive for Wal-Mart that bodes well for its long-term outlook.
Our price estimate for Wal-Mart stands at $80, which is slightly ahead of the market price.Notes:
- Wal-Mart’s Q1 fiscal 2014 earnings transcript, May 16 2013 [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩]
- There’s Is An Explanition For The Wal-Mart News That Isn’t Bad For The Economy At All, Business Insider, Feb 19 2013 [↩]
- Wal-Mart Profit Rises; Soft US Sales a Drag on Revenue, CNBC, May 16 2013 [↩]
- Walmart reports a 4.6 percent increase of Q1 EPS of $1.14; U.S. businesses forecast positive comp for Q2, Wal-Mart, May 16 2013 [↩]
- Wal-Mart’s SEC filings [↩]
- Wal-Mart’s Q1 fiscal 2014 earnings twranscript, May 16 2013 [↩]
- Wal-Mart Says Customers Remain ‘Stretched’, The Wall Street Journal, May 16 2013 [↩]
- U.S. Online Retail Sales To Reach $370 Billion By 2017, Forrester, March 13 2013 [↩]
- Wal-Mart’s Evolution From Big Box Giant To E-Commerce Innovator, Fast Company, Nov 26 2012 [↩]
- Wal-Mart’s Q4 fiscal 2013 earnings transcript, Feb 25 2013 [↩]