Wal-Mart’s Selective Discounting to Drive Sales, Maintain Margins

December 21st, 2010 by Trefis Team
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Wal-Mart (NYSE:WMT) seems to be adopting a mixed approach to drive holiday sales instead of just purely discounting all the products to drive store volumes. While this signals the retailer’s increased confidence for holiday shopping, it also represents a broader development that the US consumers might finally be growing more confident with regards to economic outlook, which should also benefit other retailers that compete with Wal-Mart like Costco (NASDAQ:COST), Target (NYSE:TGT) and Sears (NASDAQ:SHLD).

This bodes well for Wal-Mart as we maintain our bullish take on the company driven by expected improvements in sales metrics (like revenue per square foot) and stable profit margins. Our price estimate for Wal-Mart’s stock currently stands at $65.42, which is about 22% above current market price.

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Retracting Some Initial Price Rollbacks

While the economic growth has been sluggish in 2010, there were indications that the fourth quarter might be stronger than expected from early reports. October data suggested that due to payroll increases and improved employment, the 4th quarter would be strong. [1]

Then November retail sales data released last week prompted economists to boost their forecasts even further. [2] With confirmation that consumers are willing to spend this holiday, Wal-Mart decided to ease up on its initial price rollbacks on many items. We believe this will help support margins as the retailer can drive sales without heavily discounting.

Smartphone Discounts Could be Strategic

Wal-Mart is maintaining its discounts on smartphones like Apple’s iPhone 4. [3] Given that smartphones are some of the hottest selling items this holiday season and Wal-Mart wants to both attract customers and improve its sales metrics like revenue per square foot, this strategy makes sense. The retailer is increasingly moving into selling consumer electronics – a topic we discussed in a recent article Will Best Buy’s Earnings Miss Weigh on Wal-Mart? – and is one of the key beneficiaries of Best Buy’s (NYSE:BBY) recent stumbles in its holiday sales push.

As we enter the home stretch on holiday sales, we expect to see some strong numbers out of Wal-Mart.

You can see the complete $65.42 Trefis price estimate for Wal-Mart’s stock here.

Notes:
  1. Wal-Mart was providing enough incentives like discounting and free shipping to kick-start holiday spending, Bloomberg online, Nov. 6th, 2010 [↩]
  2. Retail Sales Prompt Economists to Raise US Spending Forecasts, Bloomberg online, Dec. 14th, 2010 [↩]
  3. Wal-Mart Discounts Price of iPhone 4, The Wall Street Journal, Dec 21 2010 [↩]