Less Pain At The Pump Is Good News For Wal-Mart

In the recently concluded quarter, Wal-Mart’s (NYSE:WMT) growth slowed due to sluggish consumer spending and higher gasoline prices. Retail sales and gasoline have an inverse relationship where consumers saving on fuel purchases spend more at retail stores and have less to spend when gas prices are high. The International Energy Agency predicts that the U.S. will be the largest oil producer by 2020, and as a result, oil prices are likely to come down. ^[1] With the long term outlook on energy improving, the impact of rising fuel prices on retailers such as Wal-Mart, Target (NYSE:TGT) and Costco (NASDAQ:COST) should lessen.

See our complete analysis for Wal-Mart

How Does Rise In Fuel Price Impact Retail Sales?

The recently concluded quarter for Wal-Mart was quite slow due to the overall economic situation of the U.S. This was further impacted by high gasoline prices. Retail sales and fuel sales are connected together in an indirect and inverse relationship. Shoppers will spend less at retail stores if they have to spend more on gasoline. Similarly, if the gasoline prices are low, customers are left with more to spend on retail and other needs. For instance, consumer spending in September 2012 remained below average when gasoline prices were at a peak of $3.85/gallon. ((U.S. Consumer Spending Slows in September, Gallup, Oct 5 2012)) ^[2] Common sense will tell us that the customers had less to spend at retail stores such as Wal-Mart, which impacted its growth.

Short Term And Long Term Outlook On Fuel Prices

Although the forecasts are quite uncertain, the U.S. Energy Information Administration expects the average gasoline price for 2013 to be somewhere around $3.44/gallon. ^[2] This figure will be down from 2012’s average of $3.64. This can be attributed to the global crude oil outlook for 2013 ($103 per barrel). ^[2] Thus, we expect less trouble for Wal-Mart on the account of fuel prices next year.

Looking at the long term, the International Energy Agency predicts that the U.S. can become the largest oil producer by 2020 surpassing Saudi Arabia due to boom in shale oil production. ^[1] The U.S. has vast reserves of shale oil and technologies such as hydraulic fracturing enable it to extract oil from the shale rocks. The domestic oil production has been constantly rising and the oil imports have been falling. ^[3] With the increase in the oil supplies, the price is expected to lower.

Since Wal-Mart has a wide scale presence in the U.S., its growth opportunities are limited. Given its size, macroeconomic variables impact its growth potential particularly for its U.S. business. Over time, an improvement in the U.S. economy and an increase in the consumer spending will help Wal-Mart’s growth. It will be further complemented by lower oil prices.

Our price estimate for Wal-Mart stands at $80, implying a premium of about 10% to the market price.

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

1. U.S. Oil Output to Overtake Saudi Arabia’s by 2020, Business Week, Nov 12 2012 [↩] [↩]
2. Short-Term Energy Outlook, eia, Nov 6 2012 [↩] [↩] [↩]
3. U.S. To Become World’s Biggest Oil Producer-But Hold The Applause, Forbes, Nov 13 2012 [↩]