Wal-Mart’s Earnings To Be Weighed Down By Traffic Decline And West Coast Ports Issue

Retail giant Wal-Mart (NYSE:WMT) is scheduled to release its Q4 fiscal 2015 earnings on February 19th and we expect its results to be bogged down both by a continuing decline in foot traffic and the labor unrest that has affected West Coast ports. Across the industry, buyers in numbers have switched to online shopping, which has impacted sales for a number of retailers who rely on physical stores for a bulk of their revenues. Since Wal-Mart operates over 4,000 stores in the country, it has lost more due to a fall in foot traffic than it has gained from incremental online sales. Given the retailer’s size, it will take a significant amount of time before Wal-Mart’s online channel starts making a material contribution to its revenues and compensates for the lull in store traffic. Therefore, it is highly unlikely that the company performed any better in Q4, given that foot traffic across the industry was significantly down.

Also, labor unrest at West Coast ports may well have  hindered throughput into the retailer’s supply chain during the quarter.  The shut down since the end of the quarter is sure to cause great problems, leading to a significant delays in inventory stocking if it persists. We are eager to learn more from the company  about the impact it has had and will continue to have going forward.  However, falling gasoline prices and improving job environment had a positive impact on consumer affordability, which might have had an offsetting effect on the company’s aforementioned problems. Nevertheless, the U.S. retail market did not improve much during the fourth quarter, indicating that buyers are not really spending the additional money they are saving on fuel elsewhere.

Our price estimate for Wal-Mart stands at $81, which is about 5% below the current market price.

See our complete analysis for Wal-Mart

Traffic Decline Troubled Wal-Mart

Store traffic across the industry has declined significantly over the past couple of years, owing the the ongoing online shift. Due to growing Internet penetration, proliferation of smartphones and tablets, and the convenience and incentives associated with web shopping, U.S. buyers have been purchasing more online, and are subsequently visiting fewer stores. During the holiday season, industry wide foot traffic fell a staggering 8.3% year over year, according to data compiled by RetailNext. ^[1] The decline seems even more intense considering that during the holiday season of 2013, adverse climate conditions had limited store visits considerably and buyers were forced to shop online. An 8.3% decline on top of those levels indicates that U.S. buyers are shunning stores and switching to web shopping at a rapid pace. In a separate report, RetailNext reported that store traffic across the U.S. retail market declined 7.7% in January, concluding another weak quarter for store-based retailers. ^[2]

West Coast Problems Made Things Worse

Increasing incoming shipments at West Coast ports has resulted in traffic jams, that is causing unwanted delays in movement. Amid this congestion, tense labor situation is making things worse. Dockworkers and longshoremen have been working without a contract since July 2014 and they have started speaking up against the same. There have been complete port shutdowns on several occasions, as the International Longshore and Warehouse Union (ILWU) is trying to retaliate against the Pacific Maritime Association (PMA), which represents the shippers. According to a PMA spokesman, terminals that usually saw 25-30 moves per hour are now seeing less than 10. ^[3] The lengthy dispute between ILWU and PMA is threatening a gridlock at several ports. Concerns of a complete breakdown in talks between the two parties is growing, due to which a number of retailers are ordering their inventories in advance, which is further contributing to the congestion.

According to a Kurt Salmon analysis, retailers can lose up to $7 billion this year due to traffic jams at West Coast ports. ^[3] Impact of inventory delays will most likely be visible in Wal-Mart’s upcoming results. Although the company might have moved some of its shipments through alternate channels such as air freight, it would have incurred significant costs associated with the same. Therefore, it will be interesting to find out how Wal-Mart handled the West Coast issues.

Macro-Economic Environment Was Better, But Retail Sales Were Not

Unemployment rate in the U.S. during the fourth quarter was significantly below what it was in the year ago period. In fact, jobless rate fell to a six year low of 5.6% in December, before ticking up to 5.7% in January. ^[4] With fewer jobless individuals in Q4 fiscal 2015 as compared to the same quarter last year, Wal-Mart would have seen a rise in its customer base. Also, gasoline prices were significantly lower in Q4 this year, which means consumers would have saved a lot of money on fuel.

While these savings were expected to result in a rise in retail spending, it was not the case. According to the United States Census Bureau, retail sales for the three month period ending January, increased just 2%. ^[5] While some of it can be attributed to fewer revenues from the same volume sales of gasoline, it does indicate continued weakness in consumer confidence. It appears that U.S. consumers are not spending their fuel savings elsewhere, or at least not at places that are included in the retail industry. Given that Wal-Mart is the largest retailer in the U.S. (accounting for 10% of the nation’s non-automotive spending and serving over 100 million buyers each week), it is likely that its sales did not improve much during the quarter.

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1. Holiday season U.S. store sales down 8 percent in 2014: RetailNext, Reuters, Jan 7 2015 [↩]
2. RetailNext: January store sales, traffic decline, Chain Store Age, February 6 2015 [↩]
3. West Coast ports: Retail’s $7 billion problem, CNBC, Feb 9 2015 [↩] [↩]
4. Unemployment rate, Bureau of Labor Statistics [↩]
5. Retail (excl. motor vehicle and parts dealers), United States Census Bureau [↩]