Wal-Mart Gets Cautious With Mexican Expansion Amid Weak Market Conditions

The world’s largest retailer, Wal-Mart (NYSE:WMT) operates over 2,200 stores in Mexico, that make up for over a third of its international store fleet. Despite the prevailing economic problems, the retailer has performed decently in the market over the past four quarters, thanks to the success of its self-service business and small format network, Bodega Aurrera Express. The Mexican unit of the retail giant, Walmex, aims to double its business over the next 10 years and the historical performance metrics indicate that this can be achieved.

However, the company’s expansion plan for 2015 makes its long term growth plan appear too ambitious. This year, Walmex is planning to invest a smaller amount as compared to last year for store and web expansion. The company is looking to increase its overall floor area by just 1.7 million square feet this year, while it added over 2.8 million square feet to its retail space in 2014. ^[1] Although it appears that these plans have been formulated keeping the market weakness in mind, they are somewhat in contrast with Wal-Mart’s long term goal for Mexico.

Our price estimate for Wal-Mart stands at $81, which is roughly inline with the current market price.

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Wal-Mart’s performance in Mexico last year was weak in comparison to what it has seen in the past, but it was steady nonetheless. During the first quarter of fiscal 2015 (calender 2014), the retailer’s sales increased 1.5% led by the self-service business, Supercenters, small formats and Sam’s Club. Wal-Mart reported that self-service business including Sam’s Club outpaced the market growth by 60 basis points, and growth of Supercenters and Bodega Aurrera was 400 basis points ahead of the industry. Bodega Aurrera Express and standalone pharmacies delivered double-digit comparable sales growth. In the second quarter, sales in Mexico grew 5% and comparable sales rose 1.2% with self-service, Supercenters, Bodega Aurrera, Bodega Aurrera Express and pharmacies again leading the way. Third quarter comparable sales grew 0.6%, which was slow as compared to the prior quarter, but most of Wal-Mart’s formats continued to outpace the market. Fourth quarter was marked by significant improvement in Sam’s Club performance, though overall comparable sales was disappointing at just 0.1%. ^[2]

Despite a steady performance throughout the year and certain business prospects showing immense promise, Walmex is planning cautiously for 2015 and Mexico’s prevailing market conditions might be the reason why. Last year, Mexican retailers operating over 40,000 stores saw their comparable store sales rise just 0.9%, way behind Antad’s estimates of 1.7% growth. Domestic consumption remained weak, a tax increase discouraged consumer spending, and competition from informal commerce remained intense. Protest marches in several parts of the country made things worse for the retailers. Antad (Mexico’s Retail Association) expects 2.5% increase in comparable store sales this year, but the aforementioned problems can continue to trouble retailers. ^[3]

For 2015, Walmex plans to invest 12.4 billion pesos ($813 million), which is slightly less than the amount it invested in 2014. Wal-Mart’s Mexican unit will invest just 5.6 billion pesos in store expansion and will increase its retail space by 2.1% in Mexico and 5.4% in Central America. 2.4 billion pesos are reserved for technological investments, 3.5 billion pesos for remodeling and maintenance and the remaining amount for logistics. Walmex opened 132 stores last year, investing a capital of 12.7 billion pesos, but it may open a significantly fewer number of stores this year. However, we believe that most of the store expansion investment will go towards the retailer’s promising small store format – Bodega Aurrera Express. The company said that last year’s store openings were concentrated towards the fourth quarter and hence, it plans to be more efficient this year with fewer openings.

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1. Wal-Mart de Mexico to Taper Investment Plans in 2015, The Wall Street Journal, Mar 18 2015 [↩]
2. Wal-Mart’s earnings transcripts [↩]
3. Mexican Retail Association Says Retail Sales Rose 0.9% Last Year, The Wall Street Journal, Jan 20 2015 [↩]