What Do Wal-Mart’s Results Say for Retail?
Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
February hasn’t been a good month for Wal-Mart (NYSE: WMT). First Bloomberg released internal emails pointing to weak February sales and now revenue comes in a little light for the quarter ending January 31. Even though revenue grew by 3.9% to $127.92 billion, it fell short of the consensus expectation of $128.77 billion. Perhaps even more disappointing was the retailer’s guidance for both the year and the coming quarter. The company’s guidance fell short of the $1.18 per share earnings target, and its full year estimated range was lower than anticipated, though it did include the $5.37 per share consensus estimate. Holiday sales were also soft, missing expectations, though the company did see some strength at the end of December and into January.
The earnings report wasn’t all bad news; the company did report growth in international sales, spurred in part by austerity measures in the Euro-zone. The 6.9% growth in international sales helped counter the meager 1% same-store sales growth domestically. It is worth noting that though international sales were a bright spot for the quarter, they fell short of expectations for the year. The company also reported sizable growth in free cash flow, an uptick of more than 19%. The retail giant announced an 18% increase in the annual dividend, boosting it to $1.88 a share.
Often analysts look to Wal-Mart as a bellwether of US retail, so do the company’s relatively poor results and flat outlook give cause for worry? There doesn’t seem to be major evidence of a broad slow down yet, even if Wal-Mart typically accounts for nearly 10% of non-automotive retail spending in the US. It does point to more pressure on the lower-income portion of the population, some of which is due to the recent increase in payroll taxes. Retail sales for January were in line with expectations, so it seems the increase in taxes hasn’t had a huge impact on the broader market. Another issue that may show up is the stress from rising gas prices, which would further depress sales.
Another factor, posited by Wal-Mart itself, was the delay in tax returns, forcing potential customers to hold back on spending that typically occurs in February. This may not bode well for some of the lower-end discounters like Dollar General (NYSE: DG) and Dollar Tree (NASDAQ: DLTR). All three discounters cater to a lower-income consumers and accordingly are more likely to see the effect of reduced discretionary income on their sales.
On the other end, analysts commonly see retail operations like Target (NYSE: TGT) and Costco (NASDAQ: COST) as less susceptible to these particular issues due to their wealthier customer-base. The annual incomes of Target and Costco customers are $64,000 and $96,000 respectively. For comparison's sake Wal-Mart pegs its average customer as earning roughly $40,000 annually. However, Wal-Mart’s forecast for its Sam’s Club segment, which targets a wealthier client base, was flat. Sam’s Club grew 5.6% last year during the same period, which indicates Wal-Mart is expecting a significant slowdown relative to the previous year. Target and Costco have yet to release their earnings; it remains to be seen whether they are anticipating similar slowdowns.
While Wal-Mart seems quick to blame the economy; there may be other factors at work. Both Dollar General and Dollar Tree have positioned themselves for price leadership and pursued aggressive expansion, hitting Wal-Mart on its own turf. For its part, Dollar General laid out plans to continue expanding, with intentions to add 635 new stores as well as 6,000 more employees. This expansion comes on the heels of a similarly sized expansion in 2012 and 21% earnings growth in its most recently reported quarter.
In addition, Wal-Mart has slowly lost ground to Target on the price front as well. As Target has pushed into food and put a bigger emphasis on cheaper consumables, the Minnesota-based firm has managed to take the lead often enough to warrant a few headlines confirming as much. Losing the pricing battle when Target already is perceived as providing a higher-end retail experience is a big issue for Wal-Mart, even if Target isn’t consistently a low price leader.
Despite Wal-Mart’s size, it is unclear whether its results and subsequent forecast reveal much about retail in the near term. While the company did highlight potential economic pressures, it is also facing pressures of its own that may play a larger role in its near-term performance. The company is facing competition on several fronts, and that may be the primary cause for the flat forecasts.
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