Wal-Mart (NYSE:WMT) is the world’s largest retailer, competing with companies like Target (NYSE:TGT), Costco (NASDAQ:COST), Amazon (NASDAQ:AMZN) and Best Buy (NYSE:BBY). The company recently released its earnings for last quarter and we have updated our price estimate to $70.75, which implies a 30% premium to the market price.
One of the outcomes in the earnings was continued improvements in Sam’s Club’s results. Sam’s Club is a warehouse club that charges a membership fee to its customers and gives them an opportunity to buy goods at lowest prices in the market. It offers bulk displays of brand name merchandise, including hard goods, some soft goods, commercial-sized grocery items, and selected private-label items under the “Member’ Mark”, “Bakers & Chefs” and “Sam’s Club” brands in a warehouse club format.
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While Wal-Mart’s U.S. segment posted a comparable store sales decline of 1.8% in the recent quarter, Sam’s Club posted comparable store sales growth of 2.7% which was near the higher end of the guidance (this excludes fuel).  This was driven by both an increase in traffic as well as growth in the average spend per customer. Sam’s Club has been investing in member acquisition and club re-modeling to drive traffic. The retailer also did well in discretionary items during the holiday seasons and for the 2010 full year, as it actually gained share in the consumer electronics category.  So what does all this point to?
Can Sam’s Club Match Costco Revenue per Square Foot?
The success at several levels has resulted in improvements in the revenue per square foot for Sam’s Club. We estimate that this figure for Sam’s Club increased from about $586 in 2009 to $616 in 2010. However it stands significantly smaller than that for Costco, which has a similar business model. For Costco the estimated figure was $814 for 2009 compared to $586 for Sam’s Club.
What this means is that Sam’s Club has room to grow in terms of sales productivity and it looks like that is what the company is doing now. It may be possible that while revenue per square foot figure for Costco may not see much growth given it is already on higher side, and that Sam’s Club could progress towards that standard.
What does this imply for incremental value-add to Wal-Mart?
If Sam’s Club sales per square foot matched Costco’s immediately, it would add around 2% to our current price estimate for Wal-Mart. Clearly Sam’s Club alone is not a great mover of the stock as it contributes around 5% of our price estimate. What matters most is how Wal-Mart’s regular stores perform in the U.S. and internationally.
You can modify the forecast above to see how change in revenue per square foot for Sam’s Club can impact Wal-Mart’s price estimate.Notes: