- Wal-Mart US constitutes 69% of the Trefis price estimate for Wal-Mart's stock.
- Wal-Mart International constitutes 24% of the Trefis price estimate for Wal-Mart's stock.
WHAT HAS CHANGED?
- Walmart Reports Another Stellar Quarter
The discount retailer has been leveraging its massive store base and the investments it’s made in e-commerce to supply customers with food and other goods during the pandemic. However, sales trends slowed as compared to Q2, thanks to pressures including the withdrawal of federal financial support and further Covid-19 outbreaks. Comparable-store sales growth in the U.S. landed at 6.4%, compared to 9.3% in Q2. Most of that growth came from the digital sales segment, which grew 79% (compared to 97% in Q2) and accounted for 5.7 percentage points of Walmart's 6.4% boost. In addition, Walmart's adjusted profit grew strongly at 16% year-over-year. The company also incurred incremental costs related to Covid of $600 million.
- Walmart Tiptoed Back into Buyback Spending
Walmart allocated $500 million toward share repurchases after having spent nothing in that arena in Q2. That conservative approach indicates management is still feeling cautious about the short-term growth outlook, given further Covid-19 outbreaks and surging unemployment levels in key markets like the U.S. Walmart returned $2 billion to shareholders in Q3, down 24% from the prior year.
- Walmart+ Expected To Compete With Amazon Prime
The retailer is reportedly launching a new loyalty program Walmart+ at $98/year (lower than the $119/year subscription of Amazon Prime). This service will expand upon its existing same-day grocery delivery service, Delivery Unlimited - with discounts on fuel, early access to product deals, and other perks such as reserved delivery slots. By leveraging the company's advantages in grocery and its store base, the new service can boost sales, lock in a loyal customer base, and reward customers. The exact launch date and related perks are yet to be confirmed by the company.
- Walmart To Discontinue Jet.com
Nearly four years after a $3.3 billion purchase of Jet.com, Walmart is winding it up now. Jet had helped Walmart build up its e-commerce business. However, visits to Jet.com plummeted despite efforts to rebrand the site for urban customers. The company cited the continued strength of the Walmart.com brand as a part of the reason for this exit.
- E-Commerce: Strong Revenue Driver
Wal-Mart's e-commerce operations include all web-initiated transactions, including those through Walmart.com such as ship-to-home, ship-to-store, pick up today, and online grocery, as well as transactions through Jet.com. The majority of growth is organic through Walmart.com, including online grocery, which is growing quickly.
- Growth in Omni-Channel Initiatives
Walmart U.S. provides omni-channel experience to customers, integrating retail stores and eCommerce, through services such as Walmart Pickup, Pickup Today, Grocery
Pickup, Grocery Delivery, and Endless Aisle. As of January 31, 2020, the company had over 3,000 Grocery Pickup locations and nearly 1,400 Grocery Delivery locations.
POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE
Below are key drivers of Wal-Mart's value that present opportunities for upside or downside to the current Trefis price estimate for Wal-Mart:
- US Revenue per Square Foot: The average annual revenue per square foot for Wal-Mart U.S. stores stood at $432 in 2009 and declined slightly in 2010 to $425 due to the economic slowdown. The figure remained flat in 2011 and rebounded to $436 in 2012 as the company slowed its expansion and remodeled some of its stores to occupy less space. In 2013, the figure went down slightly to $434 due to weak consumer spending in the U.S. on account of increased taxes, higher healthcare costs and gasoline prices, and a decline in foot traffic on account of the ongoing online shift. In 2014, driven by a higher contribution from small stores, partially offset by the aforementioned factors, the figure increased slightly to $439. The figure marginally declined a little to $435 in 2015, since Wal-Mart witnessed weak foot traffic and a decline in consumer spending. However, the company's domestic revenue per square foot improved since 2016, driven by the company's aggressive small store expansion, growth in its online initiatives and an increase in the grocery business. In 2018, revenue per square foot stood at $471.
Going forward, we expect Wal-Mart's revenue per square foot to increase gradually thereafter and reach $543 by the end of our forecast period. However, there can be an upside of close to 5% if this figure ends up around $578 by the end of our forecast period driven by online growth and smaller store expansion. On the contrary, there can be a 5% downside to our price estimate if this figure only increases to $507 due to persistently weak consumer confidence, fall in foot traffic and self-cannibalization.
US Number of Stores: We estimate the number of Wal-Mart stores in the U.S. to grow from about 4,770 in 2018 to about 5,060 by the end of our forecast period primarily driven by the retailer's Neighborhood format expansion in urban areas. There can be a downside of approximately 5% to our price estimate if the store count increase to only 4,700 in a situation where the company scales down its small store expansion. However, if the retailer chooses to accelerate its small store expansion taking the store count to around 5,400, there can be 5% upside to our price estimate for Wal-Mart.
U.S. Gross Margins: We estimate this figure to marginally increase from the current level of 26.8% in the near future. There could be a downside of about 5% to our price estimate if rising input costs lead to a decline in margins to about 25.7% by the end of our forecast period. On the contrary, the retailer keeps leveraging its huge buying power to get discounts from vendors, and margins reach 29%, there can be 5% upside to our price estimate.
For additional details, select a driver above or select a division from the interactive Trefis split for Wal-Mart at the top of the page.
Wal-Mart is the largest retailer in the world with nearly $514 billion in annual revenues and over 11,300 stores worldwide. The company sells goods across almost all merchandise categories including groceries, electronics, appliances, apparel, sporting goods, home furnishing products, and drugs, while strictly adhering to its EDLP (everyday low price) strategy. However, it earns around half of its revenues from groceries.
Wal-Mart operates in three business segments: Walmart U.S., Walmart International, and Sam’s Club. Walmart U.S. segment is the largest segment of its business, accounting for approximately 60% of its revenues. Sam's Club is the retailer's warehouse model where it charges its customers an annual membership fee, allowing them to buy products at heavy discounts.
SOURCES OF VALUE
The U.S. segment is the most valuable to the company. Wal-Mart has built a trusted brand with a clear value proposition and has expanded across the U.S., resulting in it becoming the nation's largest retailer.
Wal-Mart U.S. stores are bigger and yield more revenue per unit of retail space
Although Wal-Mart has fewer stores in the U.S. compared to international markets, an average U.S. store is about 2.5 times as big as the international store in terms of retail square footage. As of 2018, square footage per store for Wal-Mart US was 147,730 while that for Wal-Mart International was 57,440. Revenue per square foot for Wal-Mart's U.S. stores in 2016 was higher at $471 versus $341 for Wal-Mart's International stores. Thus, despite being similar in store count, the U.S. segment is more valuable to the company compared to its international segment.
Threat of self-cannibalization due to massive size
Like any retailer, Wal-Mart’s long-term sales and income growth depend largely on the company’s ability to open new stores and expand into new markets. However, due to Wal-Mart’s size, it runs the risk of cannibalizing its own sales figures in the U.S., thereby effectively competing with itself for market share. This is the reason why Wal-Mart has slowed down its Supercenter expansion in the U.S.
Improving store productivity and smaller stores in urban markets
Opening more Supercenters and large format stores may be difficult for Wal-Mart due to its massive presence in the U.S. The company is, therefore, focusing efforts on increasing its store productivity. To achieve this, the retailer has been remodeling its stores and converting its discount stores into supercenters. While Wal-Mart’s discount stores offer a wide assortment of general merchandise and a limited variety of food products, its supercenters offer a full-line supermarket and general merchandise. Wal-Mart closed 16 discount stores between 2013 and 2016 and opened 299 new Supercenters.
Wal-Mart’s executives have indicated that the retailer’s future stores will occupy 8% less space, cost 16% less and will run more efficiently. The retailer’s smaller stores, called Neighborhood market stores, are one-tenth the size of a typical Wal-Mart Supercenter and offers 15,000 items in comparison to 100,000 offered at a Supercenter. Although the size is much smaller, Neighborhood markets offer day-to-day groceries & general merchandise and are focused on attracting customers who shop regularly for their daily needs. This format can be successful in big cities, which have space constraints and where busy schedules limit many customers from driving to a supercenter.
Growth of online channel
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 8% between 2016 to 2020. 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. Its pay-with-cash service, which allows the customers to order online and pay at stores has already been quite successful.
Wal-Mart has spent heavily in the past two years in order to compete with Amazon and other smaller, fast-growing discounters. In 2016, Wal-Mart purchased Jet.com for $3.3 billion to further grow its e-commerce segment. In addition to the Jet acquisition, Wal-Mart plans to invest more than $1 billion to improve its pre-existing store technology and customer services.
From a marketplace perspective, the company covers more than 90 million SKUs to date, as compared to the 2 million it offered in 2013. Much of the growth comes from more retailers selling on Walmart.com.
Wal-Mart also began a free two-day shipping program which would require no membership hassle. The retailer acquired Jet.com, Moosejaw, Shoebuy, and Bonobos to support its online efforts, and is exploring the possibilities for crowdsourcing (delivery via customers) to reduce the expenses related to deliveries. Wal-Mart believes that with these strategies its e-commerce revenues will increase by around 30% annually in the near future.