Wal-Mart Stores Inc. (NYSE: WMT) is the world’s largest retailer with annual sales of more than $450 billion. It is one of the world’s largest employers with more than two million workers worldwide. However, the company’s sales have come under pressure recently due to slow U.S. economic recovery and poor market conditions in Europe. Online retailers like Amazon.com Inc. are eating into Wal-Mart’s sales, too.
Wal-Mart’s second quarter results weren’t impressive. The company’s Q2 sales jumped 2.2% YOY to $116.2 billion, but fell short of Wall Street expectations of $119 billion. Earnings came at $1.24 per share, up 5.1% from the same period last year. Wal-Mart slashed its full-year sales guidance. The company now expects its full-year sales to grow 2% to 3% compared to last year, down from the previous estimate of 5% to 6% growth.
That’s understandable given the weak consumer spending, the rather high unemployment situation, and the 2% tax hike. Wal-Mart’s same store sales in the U.S. declined 0.4% in the latest quarter. The Arkansas-based retailer accounts for about 10% of the total U.S. retail spending. That makes Wal-Mart vulnerable to consumer spending fluctuations.
There were also reports that Wal-Mart is cutting orders with suppliers due to the huge inventory pileup. Bloomberg said last week that the company is reducing its inventory for the third and fourth quarter, citing weak demand. It’s true that customers are spending less than the company projected. During the second quarter, the company’s sales rose at 2.2%, while inventory jumped 6.9%. However, Wal-Mart denied those reports, saying that Bloomberg’s claims were “blatantly false.”
On the other hand, the company is facing stiff competition from Amazon, which currently rules the digital products space. The strengthening position of Google and eBay in the e-commerce space is also a cause of worry for Wal-Mart. Its biggest competitor Target Corp. has made a smart move in this weak economic environment. Target is focusing on remodeling its stores instead of expansion. Through the remodeled stores, Target is offering fresh foods to consumers, which help the company attract traffic to its stores.
No doubt Wal-Mart is going through a rough patch. The company is facing double headwinds in the forms of weak consumer spending and fierce competition. Despite that, I believe that the company still has plenty of growth opportunities. Let’s look at where Wal-Mart’s future growth will come from.
Wal-Mart Express and Neighborhood Market
Wal-Mart knows that customers will keep buying things they need despite economic fluctuations. And grocery items are those things. So, the company is aggressively focusing on grocery items. Last year, grocery items accounted for 55% of Wal-Mart’s U.S. sales.
The company is expanding its network of small grocery stores known as “Walmart Express” and “Walmart Neighborhood Market” where it will sell exclusively grocery items. Small stores are gaining popularity in the United States as they save time for customers. Wal-Mart’s small store sales jumped 29% during the second quarter. The company plans to increase the number of small stores from 288 to 500 by 2016. Small stores have long-term potential to generate steady revenues even during tough times.
Wal-Mart is strengthening its international presence to lower its dependence on the U.S. market. In April, the company announced to open 30 new stores in China this year, and 100 new stores by 2015. Wal-Mart is spending $450 million to upgrade and expand its network in Canada. Wal-Mart’s international sales are growing at the annual rate of 15%. At the end of 2012, more than 60% of its stores were outside the United States.
Though Wal-Mart still lags behind Amazon in the e-commerce area, it represents vast growth opportunities for the company, especially in international markets. China and Brazil are the priority markets for Wal-Mart. The Chinese e-commerce market is growing at 70% to 80% annually, and Brazil’s online market is expected to jump 120% in the second half of this year.
One major problem in online markets is that companies fail to deliver products on time. Wal-Mart is exploiting that as an opportunity by promising and delivering products on-time. To achieve that, the company is opening more distribution centers in Brazil, and importing goods that are unavailable in the country.
China and Brazil both have immense growth potential. They will be the key long-term sales driver for Wal-Mart.
Wal-Mart has a P/E ratio of 14.36, and dividend yield of 2.55%. The company has also been buying back its shares to boost shareholder value. Over the past four years, Wal-Mart has repurchased about 570 million shares. During the second quarter this year, Wal-Mart spent $3.4 billion on stock buy-backs and dividends.
Wal-Mart has an attractive valuation and solid growth potential in international and online markets. Wal-Mart is lowering its dependence on weak economic scenarios by expanding its international presence and grocery stores. The company’s strong fundamentals, future growth potential, and attractive valuation make it a buy.
What are your thoughts on the growth opportunities for Wal-Mart?
Vikas is a professional financial journalist and value investor with more than four years of investing experience. Vikas spends most of his time reading investment books, writing about finance and looking for stocks that have significant growth potential.