Balanced View on Walmart
On Apr 04, 2014, we issued an updated research report on Wal-Mart Stores Inc (WMT). The retail giant reported fourth-quarter fiscal 2014 results on Feb 20.
While Walmart undoubtedly enjoys sound long-term fundamentals such as a huge scale, geographic and product diversities, aggressive cost savings and strong international presence, it has not had the best of times of late. The company delivered weak results in all four quarters of fiscal 2014.
The biggest retailer’s earnings and revenues just managed to meet the consensus mark in the fourth quarter of fiscal 2014. Revenues were soft and climbed only 1.5% year over year. Declining comparable store sales, currency headwinds and a challenging retail environment in the U.S. as well as in most international markets due to cautious consumer spending weighed on the top line and also led to a year-over-year decline in earnings.
Walmart has been witnessing sluggish comps in the past few quarters owing to a weak consumer spending environment. Middle-class consumers are struggling to cope with rising gas prices, delayed income tax refunds and higher payroll taxes.
Headwinds including the reversal of the 2% payroll tax cut, a reduction in government food benefits and severe weather are also weighing on U.S. comp sales. Walmart is also experiencing weakness in Mexico, Brazil and China, as a result of which its international revenues grew a mere 1% in fiscal 2014.
The economic strains in the U.S. and abroad are likely to pressurize Walmart’s low-income shoppers in fiscal 2015. Walmart anticipates macro-economic headwinds like reductions in government benefits, higher taxes, tighter credit and higher group health care costs to impact fiscal 2015 results.
Despite the short-term concerns, we are impressed with the company’s sound fundamentals. Its size and scale of operations and initiatives to reduce operating expenses make it appealing.
The company’s significant exposure in the international markets makes it the largest retailer in the world. Currently, the company is expanding its reach in Brazil and China by reintroducing its everyday low price strategy. The company intends to open 115 supercenter stores and around 270-300 small-format stores in fiscal 2015 in many of the markets, including the U.S., Mexico and UK.
Walmart’s e-commerce business has also been performing quite well owing to rising demand. Walmart has developed pricing optimization tools, improved its mobile applications and developed a new search engine available on its websites. It is also focusing on developing its fulfillment centers to deliver U.S. online orders at a lower cost. Walmart expects to grow global e-Commerce sales to over $13 billion in fiscal 2015, with continued focus on the U.S., UK, China and Brazil.
However, gloomy consumer spending in the near term, currency headwinds, inventory concerns and continued economic pressure keep us on the sidelines. The bribery allegations and complaints about violating food safety standards in China are also denting the company’s reputation. Walmart currently holds a Zacks Rank #4 (Sell).
However, better-ranked stocks in the retail sector include Companhia Brasileira de Distribuicao (CBD), Foot Locker, Inc. (FL) and The Kroger Co. (KR). While Companhia Brasileira de Distribuicao sports a Zacks Rank #1 (Strong Buy), Foot Locker and Kroger carry a Zacks Rank #2 (Buy).
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