International Growth Yields 2% Upside for Wal-Mart Stock

Wal-Mart (NYSE:WMT) is the world’s largest retailer, competing with the likes of Target (NYSE:TGT), Costco (NASDAQ:COST) and Best Buy (NYSE:BBY). In the second quarter of 2010, Wal-Mart reported lower profit margins and essentially flat sales growth in its U.S. stores division, which constitutes 32.4% of the company’s stock price according to our estimate.

However, Wal-Mart reported that revenue per square foot (RPSF) in its international stores rose in the second quarter, driven by new store openings and higher comparable store sales. If this growth trend continues, we see a potential 2% upside to the $65.42 Trefis price estimate for Wal-Mart’s stock. Our analysis follows below.

International growth outlook

Based on the recent performance of Wal-Mart’s international division, we expect average international RPSF to grow by about 3% in 2010, to $395, following a 7.7% decline in 2009.

Meanwhile, we expect Wal-Mart’s worldwide RPSF to decline modestly during the Trefis forecast period, reaching $380 by 2016. You can drag the trend-line in the chart below to create your own RPSF forecast for Wal-Mart and see how it impacts the company’s stock price.

In the second quarter, Wal-Mart’s international revenue growth was driven by expansion in China and Brazil and the strong performance of existing stores in Mexico. Management also reported higher average spend per customer in both China and Brazil.

Wal-Mart continues to open new stores in Canada, where consumers are likely to spend more compared to emerging markets. The company now operates 100 Canadian super centers, compared to 60 in the second quarter of 2009.

Globally, Wal-Mart has also increased the efficiency of its stores, selling more goods in less space.

Reasons for caution

Going forward, the bulk of Wal-Mart’s international growth will likely come from emerging markets like China and Brazil, which typically yield lower RPSF compared to more established international markets such as Canada. As the proportion of Wal-Mart’s international revenue from emerging markets increases, the company’s international RPSF is likely to go down.

Although Wal-Mart has made impressive inroads in emerging markets, its future prospects may be limited by the fact that  local retailers dominate most of these markets and have forged strong relationships with consumers.

You can see the complete $65.42 Trefis price estimate for Wal-Mart’s stock here.