Wal-Mart’s International Growth Will Carry U.S. Sluggishness

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Walmart

We expect Wal-Mart (NYSE:WMT) to report slow growth in the U.S. as it releases its Q2 fiscal 2014 earnings on August 15. [1] During its last quarterly earnings report, the company projected comparable store sales (CSS) growth of 0%-2% for its U.S. stores and 1%-3% for Sam’s Club for the second quarter. [2] We believe that despite top line pressure, the retailer is likely to report moderate growth in operating profits due to its ongoing efforts to control expenses. In addition, we expect a healthy increase in international comparable store sales as Wal-Mart remains cautious around its expansion in Brazil, Mexico and China, and focuses on improving store productivity.

Wal-Mart is the biggest retailer in the U.S. with over 4,000 stores across the country. It serves more than 100 million U.S. customers every week and accounts for about 10% of retail consumer spending (excluding automobile). [3] [4] Hence, the retailer’s growth is mostly dependent on its ability to open new stores as well as macro-economic trends in the U.S. In the first quarter of fiscal 2014, Wal-Mart’s comparable store sales declined by 1.4% as the economic environment in the U.S. worsened due to the prolonged cold weather and payroll tax increase. While we expect a rebound in the second quarter, the growth is likely to be low. Wal-Mart has also been opening smaller format Express stores in densely populated urban areas. It’ll be interesting to see if these stores continue to deliver double-digit comparable store sales growth as in the first quarter.

See our complete analysis for Wal-Mart

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International Business Will Be In Focus

Wal-Mart’s growth is primarily coming from its international business which is getting strong support from Brazil, Mexico and China. Although the company is slowing down its store expansion in these markets, its comparable store sales (CSS) growth has remained robust. Wal-Mart expects about 40% of its international revenue growth in fiscal 2014 to come from the increase in CSS. [5]

Comparable store sales in Brazil and Mexico stood at around 5% during the second and third quarters of fiscal 2013. With controlled expansion, Brazil’s CSS jumped to 8% in Q4 fiscal 2013 and increased by 3.7% in Q1 fiscal 2014 despite a 3.5% traffic decline. [6] The company observed similar results in Mexico as well, which indicates that its slow expansion strategy is beginning to work in its favor. [7]

Although Wal-Mart is facing some problems in China due to stiff competition and a change in shopping trends, the underlying trends are positive. Last quarter it was able to post a modest 1% CSS growth despite a 6.6% decline in store traffic, and gained market share in most countries. [6] We expect Wal-Mart’s international business to deliver promising results in the second quarter on e-commerce push and controlled expansion.

Expense Control Will Help In Margin Growth

Wal-Mart plans to reduce its SG&A expenses as a percentage of revenues by 100 basis points over the next few years. During the first year of this strategy, the retailer was able to lower the figure by 14 basis points despite some headwinds. [8] The strategy mainly includes better workflow management to improve operating efficiency. The retailer is rolling out a system to aid its store associates in managing their day-to-day activities without the constant assistance of their store managers. This makes the store operations more efficient and helps serve customers better.

The company is also installing new self-checkout convertible registers in Sam’s Club that require less store personnel and result in more productivity. [8] Also, Wal-Mart initiated shared services to look after the operations of a particular region and eliminate costs related to a number of back offices. The retailer started this in Costa Rica to serve the entire Latin American region. It is also adding more in-house private label SKUs to its shelves, which offer great value to customers and generate better margins than other national brands. [5]

Our price estimate for Wal-Mart stands at $80, which is slightly ahead of the market price.

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Notes:
  1. Wal-Mart investor relations []
  2. Walmart reports 4.6% increase in Q1 EPS of $1.14, U.S. business forecast positive comp sales for Q2, Walmart, May 16 2013 []
  3. Wal-Mart Company Statistics, Statistics Brain, July 31 2012 []
  4. Investors Climb Wal-Mart of Worry, The Wall Street Journal, Feb 21 2013 []
  5. Wal-Mart stores management presents at Bank of America Merrill Lynch Consumer & Retail conference, Seekingalpha, Mar 12 2013 [] []
  6. Wal-Mart’s Q1 fiscal 2014 earnings transcript, May 16 2013 [] []
  7. Wal-Mart’s Q4 fiscal 2013 earnings transcript, Feb 25 2013 []
  8. Wal-Mart stores management presents at Bank of America Merrill Lynch Consumer & Retail conference, Seekingalpha, Mar 12 2013 [] []