Sluggish Economy Weighs On Wal-Mart’s U.S. Results
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The retail spending in the U.S. has suffered this year due to payroll tax increase, delayed tax refunds, higher unemployment and an unusually cold spring season. In early 2013, the U.S. government increased the payroll taxes by 2% taking a chunk out of an average consumer’s earnings and leaving them with less to spend. Moreover, the tax refunds were delayed due to year end complications related to the fiscal cliff. In addition to this, the prolonged winter season impacted the sales of weather sensitive items during the first half of the year. Another factor that contributed towards Wal-Mart’s sales decline was the unemployment rate in the U.S., which remained on the higher side as the employers slowed their hiring outside the farming sector. 
The store traffic decline of 0.5% could not be offset by the growth in average ticket, which increased by just 0.2% indicating the lack of meaningful inflation and cautious consumer spending.  Even Wal-Mart’s grocery business delivered negative comparable store sales growth.  The economy is not likely to improve in the near term as the National Retail Federation has a forecast of an 8% decline in spending during the back-to-school season. 
However, Smaller Format Stores And Online Channel Will Support The Long-Term Growth
Wal-Mart already operates around 4,000 stores in the U.S. which makes it difficult for the retailer to expand. Moreover, a typical supercenter is usually located away from the urban areas and it is not always convenient for shoppers to visit there for their daily needs. Hence, they might end up shopping for groceries from local dollar stores. To tap this opportunity and continue expanding in the U.S., the company has been opening its smaller format stores, Neighborhood Markets and Wal-Mart Express, in densely populated urban areas. Neighborhood Markets registered 30% topline growth in Q2 fiscal 2014 due to strong store traffic. The Express formats also delivered double-digit CSS growth following similar results in the last quarter.  Wal-Mart plans to increase its Neighborhood Markets network by 40% and add 100 Express stores this year.  
Wal-Mart’s e-commerce segment is relatively young and contributes only about 2% to its annual revenues. However this channel registered double-digit growth in the most recent quarter.  The company is relying on a number of initiatives to boost its online business. 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.  A strong e-commerce channel will help Wal-Mart stay competitive and mitigate the growing threat from Amazon.
International Business Saw Lower Traffic, But We Remain Bullish In The Long Term
The growth of Wal-Mart’s international business has remained moderate due to the continued decline in the store traffic. The figure for Mexico, where Wal-Mart operates close to 2500 stores, declined by 3% bringing the CSS (comparable store sales) down by 1.8%.  The company saw similar results in the U.K. and Japan. Although Brazil and China have delivered promising results in the past, their CSS growth was weak in this quarter due to significant decline in the store traffic. 
Wal-Mart has slowed down its expansion in Brazil, Mexico and China in-order to build a strong foundation for comparable store sales. By reducing the number of new stores, the company is attempting to direct the traffic to a limited store network. We remain optimistic in the long term as Wal-Mart has a big opportunity in international markets due to lack of organized retail penetration and expected changes in the regulations that might favor foreign investments.
Our price estimate for Wal-Mart stands at $83, implying a premium of 5% to the market price. However, we are in the process of updating the pricing model in light of the recent earnings release.Notes:
- Wal-Mart reports Q2 EPS of $1.24, up 5.1% and adds $2.7 billion in net sales, Wal-Mart, Aug 15 2013 [↩]
- Retailers boost July sales with heavy discounts, promotions, Reuters, Aug 8 2013 [↩]
- Wal-Mart’s Q2 fiscal 2014 earnings transcript, Aug 15 2013 [↩] [↩] [↩] [↩] [↩] [↩] [↩]
- On heels of historically high back-to-school season, 2013 spending expectations decline, National Retail Federation, Jul 18 2013 [↩] [↩]
- Wal-Mart’s Q4 fiscal 2013 earnings transcript, Feb 25 2013 [↩]