We maintain our Neutral recommendation on
Wal-Mart Stores, Inc.
) following appraisal of its first quarter fiscal 2014 results.
Top-line growth coupled with productivity improvement was offset
by weak consumer spending in the quarter.
Why the Reiteration?
Walmart posted first quarter earnings of $1.14 per share,
which increased 4.6% from the prior-year earnings. Top-line
growth coupled with cost savings boosted earnings. The first
quarter fiscal 2014 results were within the company's earnings
guidance range of $1.11 to $1.16 per share.
Total revenue climbed 1.8%, driven by membership and other
income. Total e-commerce sales also grew more than 30% in the
However, both earnings and sales missed the Zacks Consensus
Estimate due to weak consumer spending during the quarter,
primarily caused by payroll tax increase. Payroll taxes in the
U.S. increased 2% since Jan 2013, which hurt lower- and
middle-income segment consumers. In addition, delay in tax
refunds, prolonged cold weather and lower-than-expected price
inflation of grocery items led to a disappointing quarter.
Overall, we are impressed with the company's size and scale of
operations. The company's significant exposure in the
international markets makes it the largest retailer in the world.
The company has 8,500 stores in 15 countries, under 55 different
names. Walmart also continues to expand internationally
especially in the emerging markets through accretive
acquisitions, new store growth and positive comparable store
Further, Walmart has also been focusing on expanding its
online business. While Walmart U.S. and Sam's Club have focused
on the e-commerce market in the U.S., Walmart International has
explored the international e-commerce markets in countries
outside the U.S., primarily the United Kingdom, Brazil and
The company has increased its share in Newheight Holdings Ltd,
a holding company that owns Chinese Internet retailer Yihaodian,
to approximately 51% during fiscal 2013. Walmart plans to grow
its retail square feet and expand its e-commerce capabilities
further in fiscal 2014.
However, Walmart has always remained under media scrutiny due
to its size and scale of operations. Walmart is currently facing
bribery allegations and lobbying charges for its operations in
Mexico, China, India and Brazil, which has severely hurt investor
Moreover, the recent debate to increase the minimum wage of
workers to at least $12.50 per hour from a minimum wage of $8.25
per hour is becoming a concern for Walmart. This will make it
harder for Walmart and other big box stores to pass on the wage
hike as a price increase. In response to this, Walmart has even
warned that it would scrap plans for three of the six stores it
had hoped to build in Washington if the bill becomes law.
Walmart continues to expect decline in consumer spending going
ahead as middle-class consumers struggle to cope with rising gas
prices, delayed income tax refunds and higher payroll taxes.
Additionally, Walmart remains exposed to unfavorable foreign
currency translations due to its considerable international
presence. Moreover, we remain cautious about the rising costs,
which keep us on the sidelines.
Walmart holds a Zacks Rank #3 (Hold).
Other retailers that are presently doing favorable business
Ingles Markets Inc
). While Ingles Markets holds a Zacks Rank #1 (Strong Buy),
Kroger and SuperValu carry a Zacks Rank #2 (Buy).
INGLES MARKET A (IMKTA): Free Stock Analysis
KROGER CO (KR): Free Stock Analysis Report
SUPERVALU INC (SVU): Free Stock Analysis
WAL-MART STORES (WMT): Free Stock Analysis
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