Wal-Mart Earnings Preview: Positive Comparable Sales Growth Unlikely

Retail giant Wal-Mart (NYSE:WMT) is scheduled to release its Q2 fiscal 2015 earnings on August 14. While the last three months haven’t been too bad for the U.S. retail market in terms of sales growth, a gradual shift in shopping preference to online shopping has hurt retailers that do not have a sizable web presence. Over the last two years, foot traffic in the U.S. has declined consistently as buyers are making more purchases online, which has troubled many retailers including Wal-Mart. The retail giant has reported comparable sales decline in the U.S. for five consecutive quarters now and this may well be the sixth given that its online channel accounts for an non-material portion of its revenues. Last month, even Wal-Mart’s CEO issued an implicit warning on the company’s Q2 earnings citing unemployment as a big concern. ^[1]

While the retailer’s sales growth is unlikely to bring any surprises, investors and analysts will me more interested on updates on Wal-Mart’s small store expansion plans. It will be interesting to see if the retailer has made any changes in its approach now that Dollar Tree-Family Dollar has emerged as a more formidable threat. Recently, Dollar Tree announced the acquisition of Family Dollar that will create a massive retail chain of over 13,000 stores targeting a range of rural, suburban and urban shoppers.  The deal thus deprives Wal-Mart of a potential acquisition option. ^[2] In addition to its small store expansion, we will keep an eye on how Wal-Mart plans to aggressively expand its online channel in the wake of changing shopping patterns. Although Wal-Mart still remains the largest grocer in the U.S. with over 4,000 stores, it must look beyond its typical big-box format in order to sustain its growth.

Our price estimate for Wal-Mart stands at $79.30, which is more than 5% ahead of the market price.

See our complete analysis for Wal-Mart

Retail Environment in Q2 Looked Good

After a slump in the first three months of 2014, sales trends in the U.S. were notably better in April and continued to improve in May. The U.S. witnessed a harsh winter this year, which kept many buyers away from stores. This resulted in significant pent-up demand that eventually lifted retail sales growth in April, when weather was less harsh, to step out. Following strong sales in April, the residual pent-up demand helped several retailers in May as well. The group of eight retailers tracked by Thomson Reuters reported an increase of 4.6% in their May sales, while it predicted the growth to be around 3.9%. ^[3] In June, strong sales during the Independence Day weekend resulted in 3.8% year-over-year increase in retail sales, according to Redbook. ^[4] The surge in online orders resulted in better-than-expected retail sales growth in July. Sales of eight retailers tracked by Thomson Reuters increased by 4.4%, which was slightly ahead of the expected 4.2% growth. ^[5]

However, Traffic Decline will Subdue Wal-Mart’s Results

Although U.S. retail sales are growing at a decent pace, store traffic across the industry is falling. According to ShopperTrak, a firm that tracks store traffic in over 40,000 outlets across the U.S., store visits have fallen consistently by close to 5% year over year in all the months of the past two years, barring April 2014. Even in July, 5% fewer shoppers went out for shopping. ^[5] This clearly indicates that buyers are increasingly switching from store shopping to Internet shopping, which is supporting retail sales growth. However, it is not helping players such as Wal-Mart, Target (NYSE:TGT) and Bed Bath & Beyond (NASDAQ:BBBY), who rely on store sales for more than 95% of their revenues. Therefore, we believe that Wal-Mart might well have a tough time in registering positive comparable sales growth in Q2, with fewer shoppers as compared to last year.

Progress on Small Store Expansion will Interest Investors

Wal-Mart hasn’t been too effective in catering to buyer needs for easy access, for which they usually go to a traditional convenience store. As a result, local convenience, dollar and grocery stores have been nibbling Wal-Mart’s low-end customer base. Expanding its smaller format network provides Wal-Mart with a great opportunity to win back those customers. The company has expanded this network aggressively over the last couple of years, but it might need to ramp up its efforts as Dollar Tree and Family Dollar have joined hands against it.

In October last year, Wal-Mart unveiled plans to open 120-150 small stores, and 115 Supercenters in fiscal 2015. Soon after, the company widened its expansion plans to about 270-300 small stores in the U.S in fiscal 2015. During the first quarter, Wal-Mart opened 13 Neighborhood markets and was on track to open 180-200 Neighborhood markets and 90-100 Express stores by the year end. Also, as the quarter ended, the company entered the third test phase of its Wal-Mart Express stores, in which it will tether these stores to a nearby Supercenter. Doing so will enable an Express store to order desired inventory from a Supercenter and receive it on the same day. This will allow Express stores to offer products that require larger storing space such as bicycles, swimming pools, etc. Although Wal-Mart’s progress on its small store expansion has looked good so far, it might have to take even stronger steps going forward to have a competitive presence in urban markets against dollar giants.

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1. Wal-Mart U.S. CEO Bill Simon steps down, USA Today, Jul 24 2014 [↩]
2. DOLLAR TREE, INC. TO ACQUIRE FAMILY DOLLAR STORES, INC. TO CREATE NORTH AMERICA’S LEADING DISCOUNT RETAILER, Dollar Tree, July 28 2014 [↩]
3. U.S. retailers beat sales expectations in May, Reuters, Jun 5 2014 [↩]
4. U.S. Retail Sales Fell In June From May – Redbook, 4-Traders, Jul 8 2014 [↩]
5. Gap, L Brands Drive July Retail Sales, The Wall Street Journal, Aug 7 2014 [↩] [↩]