Wal-Mart Expects Better Results Next Year Following A Slump This Year

by Trefis Team
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The world’s largest retailer, Wal-Mart (NYSE:WMT), has had a disappointing fiscal 2014 so far due to the prevailing economic weakness in the U.S. and traffic decline in international markets. The company’s comparable store sales in the U.S. declined in the first two quarters of fiscal 2014 on account of weak consumer spending and low inflation. Since the U.S. retail market is likely to remain subdued throughout the year and Wal-Mart is persisting with its slow international expansion strategy, fiscal 2014 results will be weak. The retailer expects its overall sales to increase by less than 2% this year compared to over 3% last year. [1]
However, in a recent meeting with investors and analysts, Wal-Mart stated that it is targeting revenue growth in the range of 3% – 5% for the next year. [1] The company believes that its smaller format stores provide a substantial growth opportunity, and therefore, it is aggressively opening such stores in urban markets. Moreover, Wal-Mart expects significant growth in its e-commerce revenues next year, with continued investments and tethering of inventory distribution systems. In international markets, alongside slow expansion, the company is looking to close some under-performing stores as well. Although this will have a negative impact on revenue growth, it will help Wal-Mart reduce operating expenses and generate higher revenue per square feet.
We currently forecast Wal-Mart’s annual revenue growth at around 3% – 3.5% for the long term. However, if the retailer can sustain an annual revenue growth of close to 5% in the long term, which is the higher end of its guidance for the next year, there can be about 10% upside to our price estimate. Our price estimate for Wal-Mart stands at $81, implying a premium of 5% to the market price.

See our complete analysis for Wal-Mart

Fiscal 2014 Will Not Yield Good Results

Wal-Mart’s comparable store sales in the U.S. declined by 1.4% in Q1 fiscal 2014 due to weak consumer spending, lower-than-expected inflation and a prolonged winter season. Due to the impact of 2% payroll tax increase and delayed tax refunds, U.S. buyers remained watchful of their spending during the quarter. Moreover, the winter season this year lingered longer than usual, which impacted the sales of warm-weather related items such as outdoor furniture, sporting goods, spring clothing etc.  Furthermore, 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. [2] Wal-Mart’s results remained weak in the second quarter as well, due to cautious consumer spending, high unemployment and low inflation. Even its international business slowed down due to significant traffic decline in markets such as Mexico, Brazil, the U.K. and China. [3]

The U.S. retail market is likely to remain weak during the remainder of the year as the economic scenario has not changed much. Some U.S. buyers have diverted their spending to cars and houses to take advantage of the low interest rates, and are spending less on other products. As a result, U.S. retail sales excluding the automotive sector increased by just 0.1% in August. [4] In an early forecast, ShopperTrak predicted that the Holiday season this year will see its weakest gains since 2009. [5] Wal-Mart has already canceled a number of supply orders due to inventory backlog resulting from weak sales, and anticipated low sales during the holiday season. [6]

However, The Following Factors Will Help Going Forward

Aggressive Expansion Of Smaller Format Stores

Wal-Mart operates a vast fleet of about 3,200 supercenters across the U.S., which mainly serve customers making less frequent stock-up trips. However, the company feels that it hasn’t catered to buyer needs for easy access for which they usually go to a traditional convenience store. [7] As a result, local dollar stores have been nibbling Wal-Mart’s low-end customer base. To continue expanding in the U.S. and fend off this competition, the company has been aggressively expanding its smaller format stores, Neighborhood Markets and Wal-Mart Express, in densely populated urban areas. The Express format has yielded good results so far, delivering double-digit comparable store sales growth during the last two quarters.

For the first time, Wal-Mart U.S. is planning to open more Express stores than its supercenters. Out of the 235-265 stores planned for fiscal 2015, 120-150 will be Express stores. Moreover, the retailer will start utilizing its large supercenters as ‘cross docks’ next year, to supply products to nearby smaller stores. [1] This way, Wal-Mart will be able to keep its goods in stock and reduce transportation expenses.

Rapid E-Commerce Growth

Online retail is gaining popularity in the U.S. due to growing Internet usage and the proliferation of smartphones and tablets. Forrester forecasts that online sales in the U.S. will grow at a compound annual growth rate of 10% between 2013 to 2017. [8] Wal-Mart expects to remain ahead of the market growth with its improved delivery efficiency and e-commerce investments. 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. Its pay-with-cash service, which allows the customers to order online and pay at stores has already been quite successful. Wal-Mart is looking to reduce its online delivery time to two days or less, and is also testing same-day delivery by leveraging its ship-from-store program. The retailer recently acquired Tasty Labs, OneOps, Inkiru and Torbit to support its online efforts, and is exploring the possibilities for crowd sourcing (delivery via customers) to reduce the expenses related to deliveries. [3] Wal-Mart believes that with these strategies its e-commerce revenues will increase to $13 billion in fiscal 2015, from an expected $10 billion in fiscal 2014. [1]

Increasing Store Productivity In Brazil & China

Brazil and China have delivered good results for Wal-Mart in the past, but recently their comparable store sales growth has gone down due to a significant decline in store traffic. In Q2 fiscal 2014, the retailer’s comparable store sales in Brazil increased by just 1.1% due to 5.5% decline in store traffic. In China, the store traffic declined by 6.8% as Chinese buyers started making weekly stock-up trips instead of frequent visits. [3]

Last year, Wal-Mart decided to slow down its expansion in Brazil and China, to build a strong foundation for comparable store sales growth and reduce operating expenses. The company is still persisting with this strategy as it plans its capital expenditure at around $11.8 billion – $12.8 billion for next year, slightly down from this year’s $12 billion – $13 billion. [1] Additionally, Wal-Mart is looking to close 50 of its under-performing stores in Brazil and China. These stores contribute about 2% – 3% to their respective regions’ sales and their closure will put a negative pressure on Wal-Mart’s revenues growth. However, new store openings in lucrative regions should offset this impact. Moreover, with fewer under-performing stores, Wal-Mart will be able to reduce its operating expenses in international markets, which have been on a higher side for some time.

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Notes:
  1. Wal-Mart predicts sales will grow faster next year, Reuters, Oct 15 2013 [] [] [] [] []
  2. Wal-Mart’s Q1 fiscal 2014 earnings transcript, May 16 2013 []
  3. Wal-Mart’s Q2 fiscal 2014 earnings transcript, Aug 15 2013 [] [] []
  4. Forecast Envisions A Weak Holiday Season, The Wall Street Journal, Sept 17 2013 []
  5. ShopperTrak Expects Holiday Sales Will Increase in 2013, ShopperTrak, Sept 17 2013 []
  6. Wal-Mart Cutting Orders as Unsold Merchandise Piles Up, Bloomberg, Sept 26 2013 []
  7. Here’s Walmart ‘s new strategy for being your everything, Washington Post, Oct 17 2013 []
  8. U.S. Online Retail Sales To Reach $370 Billion By 2017, Forrester, March 13 2013 []
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