Wal-Mart’s Earnings Will Lean On International Growth As U.S. Remains Steady

The world’s largest retailer, Wal-Mart (NYSE:WMT) is scheduled to announce its Q3 fiscal 2013 earnings on November 15. ^[1] The international segment will be the key driver to growth as the U.S. growth has been relatively stable with slower growth. In Q2 fiscal 2013, international segment revenues increased by 7.2%, whereas Wal-Mart U.S. and Sam’s Club revenues were up by around 3.5% each as compared to the same quarter last year. ^[2] Moreover, while Wal-Mart U.S. and Sam’s Club’s expansion plans are on track, the international expansion plans were changed in the last quarter’s report. ^[3] It will be interesting to see what impact it has on this quarter’s earnings.

See our complete analysis for Wal-Mart

Significance Of International Segment

The growth of Wal-Mart U.S. segment has been positive and stable in terms of revenues and comparable store sales, and is likely to continue this way. The retailer’s international operations are quite crucial for its future growth. As of last quarter, the international revenues contributed around 28% to the Wal-Mart’s net revenues. ^[2] Moreover, the revenues from this segment have increased substantially (29%) from fiscal 2010-2012. ^[2] According to our estimates, the international segment constitutes about 40% of the company’s value.

In the previous quarter, every international region generated positive comparable store sales growth for Wal-Mart with main contributors being the U.K., Canada and Mexico. ^[3] Brazil, Mexico and China still remain Wal-Mart’s key focus for the future growth. ^[3] In the last quarter, Mexico’s revenues increased by 10.5% and Brazil’s by 10.2%. ^[3] The comparable store sales increase was 3% and 5% respectively. ^[3]

Amid the strong performances, Wal-Mart decided to alter its expansion plans in these regions. The new plans included slowing down its store expansion in Brazil to build a strong foundation for comparable store sales growth, and changes in expansion strategy leading to delay in store opening in Mexico. ^[3] Furthermore, the retailer also reduced the number of new stores for China scheduled to open in the latter half of fiscal 2013. ^[3] According to these plans the new store square footage will be reduced by 50%, which is again aimed at improving the comparable store sales growth. ^[3] However, the retailer has planned an aggressive expansion for Canada for fiscal 2013 (73 projects), which is Wal-Mart’s largest ever expansion plan in the region. ^[3] It will be interesting to see how these aspects impact the international segment in Q3 fiscal 2013.

Wal-Mart U.S. Growth Remains Stable

Wal-Mart’s growth has been stable in the U.S. market. The retailer has reported four consecutive quarters of positive comparable store sales growth driven by its everyday low price strategy. ^[3] With the sluggish growth in consumer spending and prevailing unemployment, consumers are shifting towards Costco (NASDAQ:COST) and other warehouse clubs due to attractive pricing. Due to this and Wal-Mart’s wide scale presence in the U.S. market, a substantial increase in the revenues and comparable sales is less likely. Wal-Mart is also planning to penetrate urban markets with its smaller format stores, but it is still in the initial phase. Hence, we expect a low to moderate growth in this quarter as well.

Online Initiatives

With growing online competition and increasing problem of Showrooming, brick and mortar retailers such as Wal-Mart are focusing on boosting their online sales. Any initiatives in this aspect will be closely monitored by investors and analysts. With strategies such as pay-with-cash option, where customers can order online and pay at stores, the retailer is looking to integrate its products across the channels. ^[3] It will be interesting to see Wal-Mart’s strategies for the future growth in online channel.

Our price estimate for Wal-Mart stands at $80, implying a premium of about 5% to the market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Wal-Mart Investor Relations [↩]
2. Wal-Mart’s SEC filings [↩] [↩] [↩]
3. Wal-Mart’s Q2 fiscal 2013 earnings transcript, Aug 16 2012 [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩]