Wal-Mart’s Japan Stores Add Little Value to Stock
Wal-Mart (NYSE:WMT) recently announced that it will reopen 12 stores in Japan that were affected by the earthquake. [1] What should investors make of this news? We answer this question by examining Japan’s relative contribution to the company’s overall value. Wal-Mart is the world’s largest retailer, with competitors like Target (NYSE:TGT), Costco (NASDAQ:COST), Amazon (NASDAQ:AMZN) and Best Buy (NYSE:BBY).
Our price estimate for Wal-Mart stands at $70.75, a roughly 35% premium to the stock’s market price.
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Some Success in Japan, but Not a Significant Contributor to Company Value
Wal-Mart management commented during its February earnings call that its everyday low price strategy is paying off in Japan in terms of traffic and comparable store sales growth. [2] However, given the lower contribution of international business to Wal-Mart’s stock value and a relatively limited number of Japanese stores, Japan’s overall contribution to Wal-Mart’s value remains small.
We estimate that Wal-Mart international stores constitute about one third of the company’s stock value. Of Wal-Mart’s total of over 4,500 international stores at the end of of 2010, Japan contributed a little over 400. So, making a blanket assumption that each international store contributes equally to the company’s stock value, we can estimate that Japan only contributes 3% to our $70.75 price estimate.
However, given that Japan is a developed economy, one would expect revenue per square foot for Japanese stores to be above that of the average international store. But since Japan’s store tend to be a bit smaller, we believe the real value contribution will only be slightly above 3%.
As far as international growth expectations go, most of the upside for Wal-Mart will come from emerging economies. Considering the factors highlighted above, the brief halt in Japanese store operations should have minimal impact on WMT stock
See our full analysis and $70.75 price estimate for Wal-Mart stock
Notes:- Wal-Mart to reopen 12 quake-hit stores in Japan, Reuters, Mar 28 2011 [↩]
- Wal-Marts latest earnings transcript, Seeking Alpha, Feb 22 2011 [↩]