Wal-Mart Earnings Preview: Traffic Decline, Cautious Spending And Currency Headwinds Will Weigh On Growth

Retail giant Wal-Mart (NYSE:WMT) is scheduled to release its Q1 fiscal 2016 earnings on May 19th and we expect its results to be affected both by a continuing decline in foot traffic and as well as the size of its online relative to the whole. 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 Q1, given that foot traffic across the industry was significantly down in February and March.

Although there was some respite in April in the form of increased store traffic, it did not help retail sales growth as buyers did not spend freely. The retail data in the US continue to be weak.  As per the U.S. Census Bureau, retail sales across the industry were down in February and March, and data for April was flat. Given that Wal-Mart caters to over 100 million customers every week and accounts for almost 10% of the country’s non-automotive spending, its sales growth is mostly in-line with that of the industry. Looking the recent data, the quarter was likely fairly weak.

Our price estimate for Wal-Mart stands at $82, which is about 5% below the current market price.

See our complete analysis for Wal-Mart

Continued Decline In Store Traffic To Trouble Wal-Mart

Store traffic across the industry has declined significantly over the past couple of years, owing the ongoing online shift. Due to growing Internet penetration, the 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 sizable 8.3% year over year, according to data compiled by RetailNext. ^[1] In a separate report, RetailNext had reported that store traffic across the U.S. retail market declined 7.7% in January. ^[2] This decline in number of shoppers visiting stores continued in February as RetailNext reported that foot traffic fell 12.5% owing to the online shift as well as prolonged cold weather. ^[3] Though traffic data for March wasn’t available, it is unlikely that conditions would have been much better than February. Though better weather would have encouraged buyers to get out of their homes and traffic would have had some positive impact from the pent-up demand, year over year change in traffic would still have been negative.

Surprisingly in April, store traffic increased 12% compared to the year ago period, probably driven by pent-up demand and Easter weekend, but retail sales growth was negative. According to the U.S. Census Bureau, overall sales of general merchandise were down 1.4% in April as consumers remained highly cautious with their spending and Easter weekend shifted from April to March. ^[4] This indicates that Wal-Mart might not have seen much improvement in its topline growth in the first quarter of fiscal 2016.

Cautious Spending In The U.S. Weighs On Retail Market Growth

Unemployment rate in the U.S. during the first quarter was significantly below what it was in the year ago period. In fact, jobless rate fell to a six year low of 5.4% in April, and it was just 5.5% in the preceding two months. ^[5] With fewer jobless individuals in Q1 fiscal 2016 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 Q1 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 February and March actually declined 0.76%. ^[6] While some of it can be attributed to lower 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.

Currency Headwinds To Subdue International Growth

During 2014, while Wal-Mart’s international sales increased 3% in constant currency, they fell 3.9% after factoring in the currency effects. Negative currency headwinds had impacted the company’s international sales by a total of almost $2.6 billion, with dollar appreciating significantly against major currencies. Since dollar has continued to gain steam in the first quarter of this year, Wal-Mart’s international growth on a reported basis is likely to be negative despite its strong position in its main markets. In China however, in addition of currency headwinds, other issues such as government austerity measures, reduction in gift card sales and deflation in several categories will continue to trouble Wal-Mart.

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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. Winter Weather Wreaks Havoc on Retail Stores, PR Newswire, Mar 5 2015 [↩]
4. Study: April sales fall despite traffic boost, Chain Store Age, May 8 2015 [↩]
5. Unemployment rate, Bureau of Labor Statistics [↩]
6. Retail (excl. motor vehicle and parts dealers), United States Census Bureau [↩]