Paycheck Cycle a Major Obstacle for Wal-Mart
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On August 16th, Wal-Mart (NYSE: WMT) reported earnings for the second quarter of fiscal year 2013. The company had revenues of $114.3 billion which was a 4.5% increase from revenues of $109 billion in the second quarter of 2012. Net income was $4.2 billion which was a 10% increase from net income of $3.8 billion in the second quarter of 2012. Earnings per share increased by 8% to $1.18 per share, up from $1.09 per share in the second quarter of 2012. On the date of the announcement, the company’s share price dropped by $2.30 or 3% on above average volume. It was apparent that investors were disappointed because Wal-Mart’s revenues did not meet the expectations, which were $115.8 billion. Investors reasoned that since the company was unable to meet revenue estimates that its future earnings growth could be in jeopardy.
Wal-Mart faces to major obstacles which could hinder earnings growth. The first is the economy and what Wal-Mart executives call the paycheck cycle. The second is strong and persistent competitors.
Wal-Mart’s Chief financial officer Charles M. Holley said, “I don’t think the economy’s helping us” Customers are still very concerned about employment, gas prices and food inflation.” Wal-Mart’s management has spoken about the paycheck cycle where customers avoid stocking up and buy just the items that they need to make it to the next payday. The company’s President and CEO Michael Terry Duke noted that the paycheck cycle remains pronounced. Wal-Mart “cautioned that it is now seeing in international markets the same "paycheck cycle" it saw in the U.S., where customers buy immediately after payday and then make smaller purchases as money runs out."
The second obstacle to Wal-Mart’s continued growth is fierce U.S. competition. Discount store Dollar Tree (NASDAQ: DLTR) has been squeezing Wal-Mart’s profits. Dollar Tree sells all of its merchandise for $1 and consumers shop there for items like soap, pop or toothpaste. Dollar Tree reported second quarter revenue of $1.7 billion, which was a 10.5% increase from revenue of $1.54 billion in the second quarter of 2011. Same store sales showed a 4.5% increase, adding to a 4.7% increase from the second quarter of 2011.
Wal-Mart also has to contend with major competitors like Target (NYSE: TGT), which sells everything from clothing to groceries to home furnishings. Target's revenue in the second quarter was $16.78 billion, marking a 3.5% increase from the previous quarter. Heavily spending in the food and beauty products segments was the primary driver of the increase. Target is focusing on two major growth initiatives. First, the company has been offering a larger selection of food and dry goods. Second, the company has expanded into urban markets through more condensed versions of its big-box stores. Target has several new locations throughout Seattle, Los Angeles and Chicago. The company is also aiming to grow overseas as well. Target is also preparing to move into Canada in 2013, and this will mark the company's first expansion outside the U.S.
Positive News
During the second quarter the company increased its earnings-per-share guidance for the full year to $4.83 to $4.93, up from the $4.72 to $4.92 it had issued earlier.
Wal-Mart International saw second quarter sales increase by 6.4%.
Sam's Club saw second quarter sales increase by 3.8%.
Sales at U.S. stores open at least a year rose 2.2%, growing for a fourth consecutive quarter.
On August 15th, Wal-Mart launched its online VOD service Vudu in Mexico. Unfortunately for Wal-Mart the launch came on the same day that two US lawmakers announced new allegations against Wal-Mart stemming from information developed from the ongoing bribery probe against Wal-Mart de Mexico.
Negative News
August 15th Walmex V-series shares fell 6.2% to 35.80 pesos ($2.70) a share on Mexico’s stock exchange. The drop in the stock price followed the release of a letter from U.S. Reps. Henry Waxman and Elijah Cummings. The letter said “We have obtained internal company documents, including internal audit reports, from other sources suggesting that Wal-Mart may have had compliance issues relating not only to bribery, but also to "questionable financial behavior" including tax evasion and money laundering in Mexico’’.
On August 17th it was announced that an Indiana pension fund that has invested in Wal-Mart sued to gain access to documents related to allegations that Wal-Mart’s Mexican subsidiary Wal-Mart de Mexico paid bribes to get approvals for store permits.
This is especially bad news for Wal-Mart which had already announced that it would slow expansion in Mexico, because of the highly publicized Mexican bribery scandal.
During the second quarter earnings announcement Wal-Mart said that it would slow its expansion in China growth in order to optimize the profitability of its stores in the rapidly growing Chinese market.
Wal-Mart has reduced plans for international growth from 30 million to 33 million square feet to 21 million to 23 million square feet.
Conclusion
For a large and mature company, Wal-Mart has done a great job growing earnings. In the second quarter, it once again increased both domestic and international revenues and net income. Investors have taken notice of Wal-Mart’s consistent growth and have pushed the stock price close to its 52 week high. The stock has had a terrific run, and is up by 37.9% over the last 52 weeks. The increases came despite the fact that Wal-Mart faces strong competitors, and economic headwinds which have resulted in what its executives call the “paycheck cycle”. I think that the combination of fierce competition and slumping global economies will stifle Wal-Mart’s near term growth. I further believe that after the recent run-up in Wal-Mart’s stock price, that the stock will fall flat or perhaps even pullback. I like Wal-Mart as a long-term investment, but think that it is unlikely that the stock price will move above $75 in the next couple of months.
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