What Are The Implications Of Wal-Mart Closing 63 Sam’s Club Locations?

Wal-Mart (NYSE: WMT) recently announced that it will be closing 63 Sam’s Club locations and potentially laying off thousands of employees. This was an unexpected move, as many workers were not given much notice. The retailer cited slow growth and potential Sam’s Club location cannibalization as reasons behind this move. In another report, the closings came on the same day that Wal-Mart announced its plans to raise its entry-level wages for U.S. hourly employees to $11 an hour, partly as a result of the new lower corporate tax rate. As a result, the company’s stock did not react much to the news of store closures.

Sam’s Club, which is a membership-only warehouse club operated by Wal-Mart, contributes about 12% of the company’s revenues and 6% of the company’s value, per our estimates. It generally operates on lower operating margins than Wal-Mart’s other segments, though its membership fees are high-margin in nature. Below we discuss the potential impact this will have on the company’s financials.

Impact On Wal-Mart

Sam’s Club’s sales grew 4% year-over-year in the third quarter 0f 2017. Although Sam’s Club generates steady revenues from membership fees, it continues to witness intense competition from internet retailers such as Amazon (NASDAQ: AMZN). Accordingly, the retailer plans to convert up to 12 of the impacted clubs to e-commerce fulfillment centers in a move aimed at speeding up delivery of online orders. The recent Sam’s Club closures could help the company free up resources that can be focused on supporting Sam’s Club’s website as well as its in-store technology. Wal-Mart also plans to improve the club’s fresh food offerings, overall product selection and its private label, Member’s Mark. However, the company would have to refund membership fees of $45 per annum to the customers affected by the store closings.

The Costco Angle

Costco is expected to benefit from Wal-Mart’s decision to close 63 Sam’s Club locations, as 47% of the closed Sam’s Club stores fall within 5 miles of a Costco store, while 87% are within 20 miles. Given the geographical overlap with the closed Sam’s Club locations, Costco could potentially stand to add $1.8 billion in sales from the closing of Sam’s Club stores, according to Stifel Nicolaus estimates. Consequently, Costco’s stock rose slightly after the Sam’s Club store closure announcement based on these estimates. In addition, Costco has generally performed better overall than Sam’s Club in recent quarters – for example, in the most recently reported quarter, Costco’s comparable sales grew 900 basis points while Sam’s Club comparable sales grew 330 basis points. We have presented the financial metrics of both companies using our interactive platform. Costco is driving online sales with ongoing site improvements, improved online marketing activities, and distinct products and services. The retailer also rolled out two new online delivery related offerings for dry and fresh groceries. As a result, it has been able to grow its e-commerce comparable sales from 26% in August to 33% in December. Moreover, Costco’s U.S. comparable sales growth also jumped to 11% in December from just 6% in January 2017. Costco’s organic performance has been keeping pace with the U.S. retail industry, in large part due to its business model. Going forward, if Costco can capture between 30% and 50% of the affected Sam’s Club business, it could lift Costco’s comparable sales between 50 to 100 basis points, and add as many as 600,000 new members, according to an Oppenheimer report.

Our $93 price estimate for Wal-Mart’s stock is slightly below the current market price.

Please refer to our complete analysis for Wal-Mart  

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