Wal-Mart (NYSE:WMT) has been struggling with its growth lately on account of the sluggish economic environment in the U.S. Due to the impact of slow job growth and higher taxes, healthcare costs and gasoline prices, U.S. buyers spent reluctantly last year. This weighed on the retailer’s growth during the first three quarters of fiscal 2014, and most likely continued in the holiday season.
Considering that the retail market trends are indicative of Wal-Mart’s sales, we do not expect the retailer to have had a good holiday season. Owing to the extreme weather conditions and weak consumer confidence, foot traffic in the U.S. stumbled by almost 15% during the holiday season. With fewer customers visiting its stores, it might be difficult for Wal-Mart to register positive comparable store sales growth in the fourth quarter (November – January). Even though online sales growth in the U.S. was substantially better than store sales, its impact on Wal-Mart will be minimal given the immaterial size of the company’s e-commerce channel.
Our price estimate for Wal-Mart stands at $81, implying a premium of less than 5% to the market price.
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Heavy Traffic Decline Will Weigh On Wal-Mart’s Sales
Pressured by the sluggish economic environment, U.S. buyers were extremely cautious about spending last year. This was clearly visible in the recently concluded holiday season as the U.S. retail industry saw its weakest growth since 2009. Moreover, extreme weather conditions prevented buyers from completing their shopping. As a result, U.S. foot traffic declined by 19.9% for the week ended on December 15, and 21% for the week through to December 22.   ShopperTrak had even predicted 10% fewer customers for Christmas 2013 as compared to the same holiday last year. Overall, foot traffic during the holiday season decreased by a staggering 14.6%, which was significantly higher than ShopperTrak’s prediction of 1.4% decline.  Since Wal-Mart caters to more than 100 million customers in the U.S. every week, its sales largely depend on consumer shopping trends. Therefore, we believe that the retailer will feel the impact of the heavy store traffic decline.
Back in September, Wal-Mart had pulled back several inventory orders in anticipation of weak demand during the holiday season. Moreover, the company offered upto 90% discounts in its Christmas clearance sales in early January and sent 57% more promotional emails during the same time.  This suggests that the retailer struggled with its holiday sales targets.
Rise In Online Orders Might Not Lift Wal-Mart’s Results
Despite the heavy fall in foot traffic, U.S. holiday retail sales managed modest growth of 2.7%. This can be attributed to the fact that the U.S. buyers continued to buy online due to the growing popularity of e-commerce shopping and the extreme weather conditions that kept them away from stores. The boost in online orders this season is evident from the fact that United Parcel Service (NYSE:UPS), which is one of the biggest players in retail e-commerce delivery, struggled with high volumes to ship orders before Christmas. 
While the surge in online orders is a good news for the U.S. retail market, it wasn’t so pleasing for the retailers that don’t attract significant web traffic. Wal-Mart earns close to $10 billion in annual revenues from its online channel, but it does not make a material contribution to the retailer’s net sales. Since the e-commerce business constitutes less than 3% of Wal-Mart’s revenues, a surge in online sales is unlikely to have any noticeable impact on the company. Therefore, we believe that Wal-Mart had a muted holiday season.Notes:
- Retail Sales, Traffic Decreased Last Week, Says ShopperTrak, ShopperTrak, Dec 11 2013 [↩]
- U.S. Store Traffic Sinks 21% as Last-Ditch Deals Flop, Bloomberg, Dec 25 2013 [↩]
- U.S. retail sales up 2.7% in 2013 holiday season: ShopperTrak, The Economic Times, Jan 8 2014 [↩]
- U.S. retailers’ sales rise in December, but discounts slam margins, Reuters, Jan 9 2014 [↩]
- Behind UPS’s Christmas Eve Snafu, The Wall Street Journal, Dec 26 2013 [↩]