The world's largest retailer, Wal-Mart (
) recently reported its Q3 fiscal 2013 earnings with slower growth
than the market's expectations. This can be attributed to tough
economic conditions and prevailing high unemployment. The foreign
currency fluctuations also impacted reported revenues from the
international segment. We believe that these factors will influence
the retailer in the coming quarter as well and it could continue to
register slow to moderate growth.
However, the international segment posted solid results driven
by market share gains. This segment accounts for 40% of our
estimates. Moreover, Wal-Mart is improving its e-commerce channel
in the U.S. and abroad, which should help sales going forward. We
expect the upcoming holiday season quarter to be quite busy, and
Wal-Mart should be one the beneficiaries with its low cost
advantage and breadth.
See our complete analysis for Wal-Mart
Wal-Mart's Dependence On U.S. Consumer Spending
The comparable store sales of Wal-Mart U.S. and Sam's Club were up
by 1.5 % and 2.7 % respectively. Although this growth was positive,
it was below the retailer's expectations. Moreover, these reported
figures were without the impact of higher fuel prices. This implies
that the retailer has had a tough time in the third quarter due to
some major macroeconomic factors.
Consumer spending in the U.S. slowed in the latter part of the
third quarter, which impacted results. Wal-Mart accounts for about
10% of nonautomotive retail spending in the U.S., and any big
change in the consumer spending trends is likely to have an impact
on the retailer.
Unemployment & Higher Gasoline Prices In U.S. Weigh
On The Retailer
The unemployment rate in the U.S. peaked after the recession in
2008-2009. Although it has come down since, the figure increased
during the month of October to 7.9%. We believe that this had a
negative impact on Wal-Mart's growth in the quarter. However, as
the U.S. economy recovers slowly, there will be some modest job
gains that could help Wal-Mart's growth.
International Segment Looks Good
The revenues from the international business increased by 2.4%
in the third quarter. However, excluding the currency fluctuation
effect, the increase was 7.6%. This increase was mainly driven by
an increase in market share in all of the retailer's markets. With
Wal-Mart's low price advantage, we expect it to further gain market
share. Furthermore, the retailer is looking to expand its
e-commerce in crucial markets such as the U.K., China and Brazil.
It also acquired a major stake in Yihaodian, the China e-commerce
retailer. This positions Wal-Mart well in the international
market, which contributes about 28% to the retailer's revenues. The
international segment constitutes about 40% of the company's value
according to our estimates.
Our price estimate for Wal-Mart stands at $80
, implying a premium of about 10% to the market price.
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