Why Wal-Mart's Biggest Threat Isn't Amazon

Wal-Mart (NYSE: WMT  ) will release its quarterly report on Thursday, and despite a long period of sluggishness, the stock has finally made investors happy again by rising to new all-time record highs. Analysts make much of the company's ongoing battle with Amazon.com (NASDAQ: AMZN  ) as the war between online and brick-and-mortar retailers wages on. But Wal-Mart has also lost some of its competitive advantages against its traditional retail rivals, with Costco (NASDAQ: COST  ) and Target (NYSE: TGT  ) producing better growth through strategies aimed at distinguishing themselves from their peers.

Wal-Mart has come a long way since its terrible performance from 2009 to 2011, in which it posted nine straight quarters of falling same-store sales. Yet over the past two quarters, Wal-Mart has once again fallen into its old ways, with a 0.6% drop in overall U.S. same-store sales in the first half of the fiscal year showing the retailer's continuing growth struggles. Given the much faster pace of revenue growth at Amazon and even Costco's impressive sales gains lately, Wal-Mart needs to up its game once again. Let's take an early look at what's been happening with Wal-Mart over the past quarter and what we're likely to see in its report.

Stats on Wal-Mart

Analyst EPS Estimate

$1.13

Change From Year-Ago Earnings

4.6%

Revenue Estimate

$116.79 billion

Change From Year-Ago Revenue

2.5%

Earnings Beats in Past 4 Quarters

2

Source: Yahoo! Finance.

How can Wal-Mart fight harder?
In recent months, analysts have reined in their expectations on Wal-Mart earnings, cutting October-quarter estimates by more than 3% and trimming full-year fiscal 2014 and 2015 projections by about a dime per share. The stock, though, has kept rising, picking up another 3% since early August.

Wal-Mart has long had the reputation of being the low-price leader for retail, and that has led to countercyclical financial results that might have contributed to poor performance in a rebounding economy. In its July-quarter earnings report, Wal-Mart cut its guidance for the remainder of the fiscal year, pointing to customer concerns about their jobs and the costs they face for food and energy. Even though rival Target also reported troubling results, it at least posted a solid gain in same-store sales.

There's no denying that Amazon has been a thorn in Wal-Mart's side for years. The latest example comes from Amazon's deal with the U.S. Postal Service to offer Sunday delivery, which further increases Amazon's ability to get goods to customers quickly enough to satisfy many shoppers. Wal-Mart has been offering same-day delivery of groceries and some household goods, but the arms race to ever-faster delivery options still takes away from Wal-Mart's core business of having customers actually come into its stores.

Beyond Amazon, though, Wal-Mart has also lost touch in part with its once-loyal customer base. Moves to incorporate grocery offerings in its stores have made Wal-Mart more of a one-stop shopping destination, but they've also drawn attention away from the other higher-margin offerings that used to drive Wal-Mart's overall growth. By contrast, Target has sought to raise its cachet with name-brand designer partnerships and other efforts to make stores more attractively designed. As a result, Wal-Mart and Sam's Club have seen growth fall well behind Target and Costco, let alone Amazon.

The big question facing Wal-Mart is whether it can break its countercyclical reputation. Historically, as shoppers get more money to spend, they've been more likely to spring for a membership at Costco or to pay slightly higher prices at Target to get what they perceive as a higher-quality shopping experience. Wal-Mart needs to break that cycle and woo customers beyond its traditional base to keep shopping there even if their economic fortunes improve.

In the Wal-Mart earnings report, watch to see if the company can come up with an innovative way to attract either its existing customers to shop more or a new set of potential shoppers to boost sales. Without changing the business-as-usual attitude, Wal-Mart could continue to languish even as retail rivals pass it by.

Is Wal-Mart doomed to die?
With any stock, there's always more to the story than just the obvious. The Motley Fool's special free report "The Death of Wal-Mart: The Real Cash Kings Changing the Face of Retail" gives you an even broader look at the retail giant and its biggest challengers. In it, you'll see how two of Wal-Mart's rivals have consistently outperformed and how they're planning to ride the waves of retail's changing tide. You can access it by clicking here.

Click here to add Wal-Mart to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.


Read/Post Comments (5) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 12, 2013, at 4:34 PM, DoktorRoot wrote:

    Bad food, cheap, lousy made items and surly employees who are off their meds! That's why I avoid Wally World like the plague!

  • Report this Comment On November 12, 2013, at 9:08 PM, nubby46 wrote:

    they removed many brand name items to make room for their brand ....... they underpay employees

    shamelessly....... self checkout is disgraceful for a big profit store ..... Save A Lot has much better meat, less cost ..... Walmart meat is a zero.

    We go to Walmart every 6 wks. to get what we can't get elsewhere at a better price. Employees still seem to care but I would not if I were them.

  • Report this Comment On November 13, 2013, at 12:07 AM, Rantingmonkey wrote:

    Wal-Mart's real problem is that it is now being run by people who went to school to learn business instead of by those who built the business. Sam Walton's business model would never pass as a project in any business college. Instead, students are taught the same failed economic principles that see a new "largest retailer" every generation.

  • Report this Comment On November 13, 2013, at 9:07 AM, Yodatu wrote:

    The only time I shop at Walmart is when I need things like Advil (their brand), allergy meds and something quick. Other then that, I avoid Walmart. A lot of their products are sub-par. The name brand items they do carry are mostly discontinued at other retailers so they can sell them at a discounted price. I will shop at a Super Target, HEB, Kroger's and other stores. I find Super Target and HEB have lower cost then Walmart on many items. I don't care for the way Walmart treats their employees either.

  • Report this Comment On November 13, 2013, at 12:37 PM, peny wrote:

    Someone needs to smash all Wally World's its

    a shame to have them in America. A total disgraceful place.

    NO one should do business and get away with it like they do.. all the lawsuits and money put out to pay those claims,. the consumer is paying for those.

    Wally's World should only be automated because they don't like employees. And find them a pain to have to insure and give benefits too. Greedy people, terrible business.

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