Why Sam’s Club Revenue Per Square Foot Is Likely To Increase Going Forward

Wal-Mart (NYSE:WMT) operates around 630 outlets in the U.S. for its warehouse model, Sam’s Club. This format generates a higher revenue per square foot as compared to the retailer’s mainline stores, given that most purchases at a warehouse club are bulk purchases. From $611 in 2010, Sam’s Club’s revenue per square foot increased rapidly to $688 in 2012 driven by a consistent increase in the number of members and higher spending. In 2013, the figure came down slightly to $684, due to an industry-wide pullback in consumer spending on account of increased taxes and a change in spending patterns. In 2014, revenue per square foot remained roughly stable as the company was tackling the industry-wide fall in foot traffic, thanks to the ongoing online shift. Going forward, we expect Sam’s Club’s revenue per square feet to improve gradually and reach $773 by the end of our forecast period. Growth in the warehouse industry, Sam’s Club’s strong positing in the market and a consistent rise in the number of members will help the segment improve its productivity.

Our price estimate for Wal-Mart stands at $81, which is slightly ahead of the current market price.

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Warehouse Industry Is Getting Popular

Warehouse clubs, a more than $390 billion industry, started with the idea of providing goods at lower costs and building a loyal customer base. Major warehouse clubs such as Costco (NASDAQ:COST) and Sam’s Club started generating promising results immediately. Costco reached $1 billion in revenues within its first three years, and Sam’s Club crossed $12 billion in annual revenues within 10 years of its inception. Some consumer reports have suggested that buyers can save up to 55% when shopping at warehouse clubs. Moreover, these clubs provide an enjoyable shopping experience as they keep on introducing new products, brands and varieties from time to time. As a result, while the U.S. general merchandise store sales increased by 47% during the period of 2001-2011, warehouse clubs saw their sales jump by more than 137%. ^[1] Therefore, we expect customers to keep coming to warehouse clubs such as Costco and Sam’s Club, which will have a positive impact on new membership signups and ultimately, revenue per square foot.

Increasing Membership Signups

Due to their attractive bargains, warehouse clubs are likely to perform well irrespective of the economic environment. This can be gauged from fact that both Sam’s Club and Costco reported positive growth over the last couple of years, when the entire retail market was struggling with weak consumer spending and low foot traffic. Yes, Costco’s growth was much better than Sam’s Club’s given that it is a pure play warehouse retailer, but Sam’s Club’s performance was good relative to Wal-Mart’s mainline segments. Sam’s Club’s historical growth has been backed by an increase in the number of members, which is evident from the fact that its membership income has increased consistently. Membership income stood at $2.9 billion in 2010 and increased to $3.42 billion in 2014, barring small decline in 2012. Apart from an increase in membership fee, the consistent rise in new signups was responsible for this growth. The company typically has a $35 and $40 membership fee, but it has also been introducing $10 and $15, memberships which are short-term fractional memberships intended at getting customers comfortable with Sam’s Club. Given that the warehouse industry only has three main players and customers are continuously looking for money saving deals, we believe that membership signups at Costco, Sam’s Club and BJ’s Wholesale Club will continue to increase in future. This in turn will have a positive impact on revenue per square foot.

Sam’s Club Has A Small Advantage Over Costco

While there is no question about the growth potential in the industry, it now comes down to analyzing which warehouse club a new buyer would choose. Although recent growth metrics indicate that Costco has clearly been the preferred choice, some factors make Sam’s Club a better bet. Compared to an annual membership fee of $55 at Costco, Sam’s Club charges only $45 from its members. While an executive member at Costco pays $110 per year, Sam’s Club’s plus members pay only $100. The rewards offered by both retailers are quite similar, and amount to 2% of their annual purchases. Therefore, Sam’s Club seems to have a clear competitive advantage in terms of membership fee.

Also, Costco operates just over 450 stores in 40 states of the U.S. and Puerto Rico, with high concentration around California. The retailer earns about 24% of its domestic revenues from the region, indicating that it is susceptible to self-cannibalization. On the other hand, Sam’s club is evenly spread across the U.S. with over 630 stores in 47 states and Puerto Rico, clearly implying that it has a wider geographical reach. Sam’s Club also provides excellent services for delivery, installation and technical support. In case of groceries, which is the largest product category sold by both warehouse retailers, Sam’s Club is reportedly cheaper than Costco. Although Costco has a larger product variety, Sam’s Club has access to a larger customer demographic, which places it at an advantageous position.

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1. Research and Markets: 2012 Report on the $390 Billion US Warehouse Clubs & Superstores Industry Featuring Wal-Mart, Costco, BJs and Meijer, Reuters, Sept 28 2012 [↩]