Diluted Mexico Tax Reform Is Good News For Wal-Mart Amid A Weak Economy

by Trefis Team
-4.52%
Downside
84.78
Market
80.95
Trefis
WMT
Wal-Mart
Rate   |   votes   |   Share
Wal-Mart (NYSE:WMT) operates about one-fourth of its global store fleet in Mexico where the retail market has shown robust growth over the last few years. Although the retailer has done well in the region historically, its comparable store sales growth has come down lately due to a decline in store traffic. Last year, Wal-Mart decided to slow down its expansion in Mexico to improve its comparable store sales amid a tough economic environment marked by low government spending and weak consumption. Consumer confidence was suffering due to the possible implementation of sales tax on food and medicine. However, the government decided against it, which came as a relief to Wal-Mart as it earns 65% of its revenues from these product categories. We believe that the new reform removes a roadblock from the company’s quest to boost its business in Mexico.

See our complete analysis for Wal-Mart

Why Is Mexico Important For Wal-Mart?

Out of its 10,000 stores across the globe, Wal-Mart operates about 2,300 stores in Mexico, making it the second biggest market for the retailer after the U.S. [1] Historically, Mexico’s retail market has remained strong as the region has sustained its economic growth and kept inflation under control. [2] Moreover, financing and consumer credits have played an important part in boosting retail sales. Several retailers are evolving into financing bodies by providing the option of deferred payment at a cash price. “Meses sin intereses,” or monthly payments with no interest, has become a common practice in the market. Last year, the market growth exceeded GDP growth with strong performance from department stores and specialty retailers. [2] During 2007-2012, retail sales in Mexico grew at a compound annual growth rate of 3.5% and are expected to grow by about 5% annually (CAGR) through to 2017. [3]

Wal-Mart achieved healthy comparable store sales growth in the region last year. The retailer’s comparable store sales increased by about 3.3% on average during the last three quarters of fiscal 2013. This growth is impressive given the size of the company’s business in Mexico and a constant decline in store traffic.

The Economy Has Been Weak Lately

Although Mexico’s retail sales have grown in the last few years, they declined unexpectedly during the initial period of 2013. [4] [5] This is attributable to weak consumer confidence and a slowdown in the overall economy. Mexico’s economy shrank by 0.74% in the second quarter due to lower government spending, weak demand for exports and sluggish consumption. This marked the first decline in the country’s economy in the last four years. [6]

Mexico’s strong ties with the U.S. economy seem to be preventing it from enjoying strong economic growth that its emerging market peers such as Brazil have. [6] Due to weakness in the economy, the largest retailer in the region Walmex (Wal-Mart Mexico) witnessed sales declines in consecutive months of July and August. Moreover, comparable store sales for other Mexican retailers also fell by 2.3% in July. [7] The government now expects the economy to expand by only 1.8% compared to its previous expectation of 3.1%. [6]

Tax Reform Comes As A Relief For Wal-Mart

Over the past few years, Wal-Mart has expanded aggressively in Mexico to take advantage of its tremendous market potential. However, last year it decided to slow down its expansion to build a strong foundation for comparable store sales growth. We believe that the company made this move to address the consistent decline in its store traffic. Continued expansion can divide customers among different stores and weigh on the retailer’s same store sales growth. During the past five quarters, store traffic at Wal-Mart stores declined by 2.2% on average. Moreover, the recent economic slowdown has also impacted the retailer’s growth as its comparable store sales fell by 1.6% in Q2 fiscal 2013. [1]

The recent tax reform comes as a relief for Wal-Mart as it is likely to assist the retail industry’s growth in the region. The government will not be including sales tax on essential items such as food and medicine. [7] This should help Wal-Mart sustain its comparable store sales in the near future as consumer confidence picks up.

Our price estimate for Wal-Mart stands at $81, implying a premium of 5% to the market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

Notes:
  1. Wal-Mart’s SEC filings [] []
  2. Retailing in Mexico, Euromonitor International, Feb 2013 [] []
  3. The Future of Retailing in Mexico to 2017, Report Linker, Aug 2013 []
  4. Mexico Retail Sales YOY, Trading Economics []
  5. Mexican Retail Sales Unexpectedly Fall ror Second Month in a Row, Bloomberg, May 22 2013 []
  6. Mexico cuts outlook as economy shrinks in first since ’09, Reuters, Aug 20 2013 [] [] []
  7. Diluted Mexico tax reform gives retailers relief but no panacea, Reuters, Sept 11 2013 [] []
Rate   |   votes   |   Share

Comments

Name (Required)
Email (Required, but never displayed)
Be the first to comment!