Can Wal-Mart Get to $70 on Domestic Sales Growth?

by Trefis Team
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Wal-Mart (NYSE:WMT), which competes with retailers like Costco (NASDAQ:COST), Target (NYSE:TGT), Best Buy (NYSE:BBY) and Amazon (NASDAQ:AMZN), recently released its Q3 report of 2010.

US same-store sales were down 1.3% YOY marking the sixth sequential quarterly decline. However, site traffic on Thanksgiving was up 50% YOY and 30% up YOY on Black Friday.We’ve previously examined the benefit from international expansion, but there is further potential upside to stock from US operations.

We currently have a Trefis price estimate of $65.42 for Wal-Mart’s stock, which is currently 20% above current price. Wal-Mart’s domestic operations and international operations currently constitute little less than two-thirds and around one-third respectively of our estimated intrinsic value for WMT.

With increased spending, we calculate a 2% stock price sensitivity to a 5% change in our forecasted total of 2013 international stores.

Consumer Spending Picking Up

Although increased early holiday shopping could be indicative of a pick up in consumer spending, we note that improvements might also be due to a temporary release of pent-up demand. Still, there are other indicators suggesting improved consumer confidence amongst retailers. We wrote last week about the Cyber Monday sales lifting Best Buys Outlook, which also holds true for Wal-Mart. (See Best Buy’s Gross Margin Impact on Holiday Promotions.) Also, U.S container imports of toys increased by 20% on a YOY basis, according to trade intelligence firm PIERS.

Though we project the revenue per square foot for Wal-Mart US to remain flat, an 8% increase by end of our forecast period implies almost 6% upside to our current Trefis price estimate of $65.42.

Gross Margin Outlook

Despite the trending declines in US same-store sales, Wal-Mart has maintained consistency in US gross profit margins over the past few years, ranging between 26 to under 28%, implying successful cost controls.

We project US gross profit margin to remain flat, however, should spending improve, an 2% increase by end of our forecast period would provide further upside of 4% beyond our current Trefis price estimate of $65.42. Wal-Mart’s price is highly sensitive to US gross profit margin, and an increase of US gross profit margin by 100 basis point adds nearly 3% upside.

Should these two scenarios materialize, there would be around 10% upside to our current Trefis price estimate of $65.42 (which is already 20% above market value). Excluding potential upside from international expansion, as previously discussed, this scenario could justify a $ 70 stock price Wal-Mart.

See our complete analysis for Wal-Mart here.

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