Merchandising Initiatives Could Improve Wal-Mart’s U.S. Profit Margins

Wal-Mart’s (NYSE:WMT) gross profit margin from its U.S. operations has risen steadily over the past few years – from an estimated 26% in 2006 to 27.5% in 2009. The trend has been sparked by several merchandising initiatives that have decreased markdown activity and lowered inventory shrinkage. Wal-Mart mainly competes with retailers like BJ’s Wholesale Club (NYSE:BJ), Costco (NASDAQ:COST) Best Buy (NYSE:BBY) and Target (NYSE:TGT).

We expect Wal-Mart to maintain its margin at the current level of 27% throughout our forecast period. Trefis members, however, anticipate that Wal-Mart’s U.S. margin will increase to 29%, implying 5% upside to our price estimate for WMT stock.

We maintain a $65.42 price estimate for Wal-Mart Stock, implying a premium to market price.

More Leverage Over Vendors with Reduced Competition

Due to continued losses during the prevailing recessionary environment, many retail chains have shrunk in size or have closed down completely. This presents an opportunity for Wal-Mart to increase its scale and household penetration. If Wal-Mart is successful in increasing its reach and size, it will have more leverage over vendors and may be able to negotiate even lower prices, thereby improving margins.

Merchandising Initiatives Will Drive Margins

In early 2009, Wal-Mart introduced Project Impact, an initiative to remodel its stores and increase efficiency. The goal was to reduce clutter in its stores, making them cleaner and friendlier for customers. ^[1] Wal-Mart has been successful in reducing its inventory size, leading to fewer markdowns and expects year-over-year inventory improvement to continue.

Another strategy implemented by Wal-Mart was the “Win-Play-Show” program that caused a reduction in the number of stock-keeping units (SKUs) available in stores, a positive from a logistics standpoint. ^[2]

See our full analysis and $65.42 price estimate for Wal-Mart

Trefis Community Forecast

Trefis community members expect Wal-Mart’s U.S. gross profit margin to increase from 27.5% in 2009 to 29% by the end of our forecast period, compared to the flat Trefis estimate of around 27% over the same period. The member estimates imply an upside of 5% to our $65.42 price estimate for Wal-Mart stock.

1. Wal-Mart’s Strategic Initiatives, About.com [↩]
2. Walmart’s ‘Win-Play-Show’ Assortment Strategy, Logisticsviewpoint, July 23, 2009 [↩]