The world's largest retailer Wal-Mart (
) struggled for growth during the first three quarters of fiscal
2014 due to the weak economic environment in the U.S. and a traffic
decline in international markets. Its U.S. segment comparable store
sales declined by 0.8% during the first nine months of fiscal 2014
and Sam's Club's comparable sales increased by just 0.3%. When the
company comes out with its Q4 results on February 20, we do not
expect the scenario to be any different.
Last year's holiday season was a tepid one for the U.S. retail
market as weak consumer confidence and extreme weather conditions
led to a significant decline in store traffic. This impacted
several retailers' holiday sales and Wal-Mart was no different.
Even the surge in online orders did not help the company, due to
its relatively small e-commerce channel. In a recent business
update, Wal-Mart stated that the reduction in SNAP (the U.S.
government Supplemental Nutrition Assistance Program) benefits also
weighed on its sales.
Additionally, the company lowered its EPS guidance for the
fourth quarter and full year on account of aforementioned factors.
Wal-Mart also said that the impact of discrete items on its EPS was
greater than its earlier forecast due to certain new items.
Wal-Mart now expects its EPS to be slightly below the low end of
its guidance of $1.60-$1.70 for Q4 and $5.11-$5.21 for the full
Our price estimate for Wal-Mart stands at $81
, implying a premium of about 10% to the market price.
See our complete analysis for Wal-Mart
Traffic Decline And Reduction In SNAP Benefits Will
Pressured by the weak economic environment, U.S. buyers were
extremely cautious about their spending last year. This was clearly
visible in the recently concluded holiday season as the U.S. retail
industry saw its weakest growth since 2009. Moreover, extreme
weather conditions prevented buyers from completing their shopping.
As a result, U.S. foot traffic declined by almost 17.7% in December
2013 as compared to December 2012. Overall, foot traffic during the
holiday season decreased by a substantial 14.6%, which was
significantly higher than ShopperTrak's earlier prediction of 1.4%
decline. In a recent update, Wal-Mart stated that winter storms
impacted its store traffic throughout the quarter, resulting in
Additionally, the reduction of SNAP benefits had a greater
impact on the retailer's sales than its initial expectations. The
SNAP program provides purchasing-assistance on food products to
low-income groups. On November 1, 2013, the U.S. government
decreased the maximum allotment to households qualifying for SNAP
by 5.5%. This impacted more than 47 million customers, who ended up
using fewer food stamps. Being the largest grocer in the U.S.,
Wal-Mart was at the receiving end of this trend.
The company now expects its comparable store sales for the
fourth quarter to be negative, while it had earlier projected the
figure to remain flat. For Sam's Club, Wal-Mart expects comparable
store sales to be lower than its earlier guidance of 0%-2%.
Rise In Online Orders During The Holiday Season Won't
Despite the heavy fall in foot traffic, U.S. holiday retail
sales managed modest growth of 2.7%. This can be attributed to the
fact that the U.S. buyers continued to buy online due to the
growing popularity of e-commerce shopping and the extreme weather
conditions that kept them away from stores. The boost in online
orders this season is evident from the fact that
United Parcel Service
), one of the biggest players in retail e-commerce delivery,
struggled with high volumes to ship orders before Christmas. While
the surge in online orders is good news for the U.S. retail market,
it wasn't so pleasing for the retailers that don't attract
significant web traffic. Wal-Mart earns close to $10 billion in
annual revenues from its online channel, but it does not make a
material contribution to the retailer's net sales. Since the
e-commerce business constitutes less than 3% of Wal-Mart's
revenues, a surge in online sales is unlikely to have any
noticeable impact on the company, given its sheer size.
New Discrete Items Will Drag Wal-Mart's EPS Down
At the end of the third quarter, Wal-Mart had projected its Q4
earnings per share to be around $1.50-$1.60, with the underlying
EPS in the range of $1.60-$1.70. The $0.10 per share impact came
from store closures in Brazil and China, and transactions in India
related to termination of franchise and supply agreements. Now, not
only is the company expecting its underlying EPS to be lower than
its earlier guidance, but the impact of discrete items has also
increased due to some new items. Instead of $0.10 per share,
Wal-Mart expects the impact to be $0.26 per share due to higher
charges in India transaction, Brazil non-income tax and
employment claim contingencies, China store lease expense
charges and Sam's Club U.S. staff restructuring and club
The retailer expects to incur additional charges related to
employment claims and non-income tax examinations in Brazil. It is
also changing its lease accounting practice in China to make it
similar to the U.S., which will result in certain charges.
Additionally, Wal-Mart is changing its in-store leadership and
staff structure in Sam's Club, which will add to its expenses.
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