Wal-Mart’s Results Will Be Impacted By Traffic Decline, Reduction In SNAP Benefits and New Discrete Items

The world’s largest retailer Wal-Mart (NYSE:WMT) struggled for growth during the first three quarters of fiscal 2014 due to the weak economic environment in the U.S. and a traffic decline in international markets. Its U.S. segment comparable store sales declined by 0.8% during the first nine months of fiscal 2014 and Sam’s Club’s comparable sales increased by just 0.3%. When the company comes out with its Q4 results on February 20, we do not expect the scenario to be any different.

Last year’s holiday season was a tepid one for the U.S. retail market as weak consumer confidence and extreme weather conditions led to a significant decline in store traffic. This impacted several retailers’ holiday sales and Wal-Mart was no different. Even the surge in online orders did not help the company, due to its relatively small e-commerce channel. In a recent business update, Wal-Mart stated that the reduction in SNAP (the U.S. government Supplemental Nutrition Assistance Program) benefits also weighed on its sales. ^[1]

Additionally, the company lowered its EPS guidance for the fourth quarter and full year on account of aforementioned factors. Wal-Mart also said that the impact of discrete items on its EPS was greater than its earlier forecast due to certain new items. Wal-Mart now expects its EPS to be slightly below the low end of its guidance of $1.60-$1.70 for Q4 and $5.11-$5.21 for the full year. ^[1]

Our price estimate for Wal-Mart stands at $81, implying a premium of about 10% to the market price.

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Traffic Decline And Reduction In SNAP Benefits Will Impact Sales

Pressured by the weak economic environment, U.S. buyers were extremely cautious about their spending last year. This was clearly visible in the recently concluded holiday season as the U.S. retail industry saw its weakest growth since 2009. Moreover, extreme weather conditions prevented buyers from completing their shopping. As a result, U.S. foot traffic declined by almost 17.7% in December 2013 as compared to December 2012. ^[2] Overall, foot traffic during the holiday season decreased by a substantial 14.6%, which was significantly higher than ShopperTrak’s earlier prediction of 1.4% decline. ^{[3] [4]} In a recent update, Wal-Mart stated that winter storms impacted its store traffic throughout the quarter, resulting in weak sales. ^[1]

Additionally, the reduction of SNAP benefits had a greater impact on the retailer’s sales than its initial expectations. The SNAP program provides purchasing-assistance on food products to low-income groups. On November 1, 2013, the U.S. government decreased the maximum allotment to households qualifying for SNAP by 5.5%. ^[5] This impacted more than 47 million customers, who ended up using fewer food stamps. ^[6] Being the largest grocer in the U.S., Wal-Mart was at the receiving end of this trend.

The company now expects its comparable store sales for the fourth quarter to be negative, while it had earlier projected the figure to remain flat. For Sam’s Club, Wal-Mart expects comparable store sales to be lower than its earlier guidance of 0%-2%. ^[1]

Rise In Online Orders During The Holiday Season Won’t Help

Despite the heavy fall in foot traffic, U.S. holiday retail sales managed modest growth of 2.7%. ^[3] This can be attributed to the fact that the U.S. buyers continued to buy online due to the growing popularity of e-commerce shopping and the extreme weather conditions that kept them away from stores. The boost in online orders this season is evident from the fact that United Parcel Service (NYSE:UPS), one of the biggest players in retail e-commerce delivery, struggled with high volumes to ship orders before Christmas. ^[7] While the surge in online orders is good news for the U.S. retail market, it wasn’t so pleasing for the retailers that don’t attract significant web traffic. Wal-Mart earns close to $10 billion in annual revenues from its online channel, but it does not make a material contribution to the retailer’s net sales. Since the e-commerce business constitutes less than 3% of Wal-Mart’s revenues, a surge in online sales is unlikely to have any noticeable impact on the company, given its sheer size.

New Discrete Items Will Drag Wal-Mart’s EPS Down

At the end of the third quarter, Wal-Mart had projected its Q4 earnings per share to be around $1.50-$1.60, with the underlying EPS in the range of $1.60-$1.70. The $0.10 per share impact came from store closures in Brazil and China, and transactions in India related to termination of franchise and supply agreements. ^[1] Now, not only is the company expecting its underlying EPS to be lower than its earlier guidance, but the impact of discrete items has also increased due to some new items. Instead of $0.10 per share, Wal-Mart expects the impact to be $0.26 per share due to higher charges in India transaction, Brazil non-income tax and employment claim contingencies, China store lease expense charges and Sam’s Club U.S. staff restructuring and club closure.

The retailer expects to incur additional charges related to employment claims and non-income tax examinations in Brazil. It is also changing its lease accounting practice in China to make it similar to the U.S., which will result in certain charges. Additionally, Wal-Mart is changing its in-store leadership and staff structure in Sam’s Club, which will add to its expenses. ^[1]

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1. Walmart updates FY14 underlying EPS guidance for fourth quarter and full year, Walmart, Jan 31 2014 [↩] [↩] [↩] [↩] [↩] [↩]
2. Retailing Today: December 2013, ShopperTrak, Jan 8 2014 [↩]
3. Retailers See Fourth Consecutive Quarter Annual Sales Increase During 2013 Holiday Season, ShopperTrak, Jan 8 2013 [↩] [↩]
4. ShopperTrak Expects Holiday Sales Will Increase In 2013, ShopperTrak, Sept 17 2013 [↩]
5. About the November 1 SNAP/Food Stamp Benefit Reduction, Food Research And Action Center [↩]
6. Cut in Food Stamps Forces Hard Choices on Poor, The New York Times, Nov 7 2013 [↩]
7. Behind UPS’s Christmas Eve Snafu, The Wall Street Journal, Dec 26 2013 [↩]