In the recently concluded quarter, Wal-Mart's (
) growth slowed due to sluggish consumer spending and higher
gasoline prices. Retail sales and gasoline have an inverse
relationship where consumers saving on fuel purchases spend more at
retail stores and have less to spend when gas prices are high. The
International Energy Agency predicts that the U.S. will be the
largest oil producer by 2020, and as a result, oil prices are
likely to come down. With the long term outlook on energy
improving, the impact of rising fuel prices on retailers such as
Wal-Mart, Target (
) and Costco (
) should lessen.
See our complete analysis for Wal-Mart
How Does Rise In Fuel Price Impact Retail Sales?
The recently concluded quarter for Wal-Mart was quite slow due
to the overall economic situation of the U.S. This was further
impacted by high gasoline prices. Retail sales and fuel sales are
connected together in an indirect and inverse relationship.
Shoppers will spend less at retail stores if they have to spend
more on gasoline. Similarly, if the gasoline prices are low,
customers are left with more to spend on retail and other needs.
For instance, consumer spending in September 2012 remained below
average when gasoline prices were at a peak of $3.85/gallon
U.S. Consumer Spending Slows in September
, Gallup, Oct 5 2012)) Common sense will tell us that the customers
had less to spend at retail stores such as Wal-Mart, which impacted
Short Term And Long Term Outlook On Fuel Prices
Although the forecasts are quite uncertain, the U.S. Energy
Information Administration expects the average gasoline price for
2013 to be somewhere around $3.44/gallon. This figure will be down
from 2012's average of $3.64. This can be attributed to the global
crude oil outlook for 2013 ($103 per barrel). Thus, we expect less
trouble for Wal-Mart on the account of fuel prices next year.
Looking at the long term, the International Energy Agency
predicts that the U.S. can become the largest oil producer by 2020
surpassing Saudi Arabia due to boom in shale oil production. The
U.S. has vast reserves of shale oil and technologies such as
hydraulic fracturing enable it to extract oil from the shale rocks.
The domestic oil production has been constantly rising and the oil
imports have been falling. With the increase in the oil supplies,
the price is expected to lower.
Since Wal-Mart has a wide scale presence in the U.S., its growth
opportunities are limited. Given its size, macroeconomic variables
impact its growth potential particularly for its U.S. business.
Over time, an improvement in the U.S. economy and an increase in
the consumer spending will help Wal-Mart's growth. It will be
further complemented by lower oil prices.
Our price estimate for Wal-Mart stands at $80
, implying a premium of about 10% to the market price.
How a Company's Products Impact its Stock Price at