How is Wal-Mart’s Profitability Trending?

Wal-Mart‘s (NYSE:WMT) discount business model naturally means that profit margins will be slim, but the retailer more than makes up for its modest profitability through sheer volumes. However, the company’s margins are likely to see even further pressure going forward as it continues to expand its small-format stores (Neighborhood Markets) in urban areas. These stores mainly offer grocery and other high-frequency items, which bodes well for the company’s future sales volumes. However, the grocery business is low-margin by nature, so the company increasing its dependence on this category will likely result in additional margin pressure. Moreover, enhanced focus on the online channel is also squeezing Wal-Mart’s margins, given that it is (at the moment) a less profitable business segment compared to traditional brick and mortar.

We expect the company’s revenue to grow at 1% CAGR (Compound Annual Growth Rate) between 2012 and 2018 due to Wal-Mart’s ongoing steady top line growth. We also expect the company’s SG&A (Selling, General and Administrative) expenses to increase at a faster rate than its revenue due to the operational costs incurred related to the maintenance of already open stores and opening of new stores. Additionally, with its focus on urban areas, the company will have to pay higher real estate prices. The company’s operating costs will be further boosted by the additional expenses related to its investments in e-commerce and likely higher wages. These factors have driven the company’s EBITDA margin to decline 90 basis points between 2012 and 2015, and we expect them to continue going forward.

Have more questions about Wal-Mart? Please refer to our complete analysis for Wal-Mart

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