As the top retailer in the country, Wal-Mart (NYSE: WMT ) struggles whenever economic growth is weak. At one point, its position as a low-price leader could drive traffic from value-seeking customers in bad times. However, today its market share is already so high that this effect is swamped by spending cutbacks among its core customers.
That's why I haven't been surprised whatsoever by Wal-Mart's inability to generate sales growth in the U.S. this year. Time and again, its executives have explained away weak results, while promising better times ahead. However, this unfortunate trend shows no signs of stopping.
Wal-Mart's year got off to a rocky start as the U.S. payroll tax reset to its pre-stimulus level. This change lopped 2% off every worker's take-home pay (for the first $113,700 of income). The payroll tax increase had a big impact on Wal-Mart's core customers. A delay in processing income tax refunds added to consumers' troubles.
The result was very slow sales in the first few weeks of February. One Wal-Mart executive described the sales trend as "a total disaster" in an email that was leaked to Bloomberg. While trends improved later in the quarter, Walmart U.S. still experienced a 1.4% comparable-store sales decline in the first quarter.
And a weak finish
Management tried to put a good spin on things after the poor first-quarter result. The company's earnings release highlighted a projection that U.S. comparable-store sales would turn positive again in Q2. This hope proved to be unfounded, as Walmart U.S. comp sales fell 0.3% in the second quarter. This development forced Wal-Mart to cut its full-year EPS guidance. However, it pointed out that at least the decline was much smaller than in Q1.
Last week, Wal-Mart reported third-quarter earnings, and, sure enough, comp sales declined yet again for the Wal-Mart U.S. division. The 0.3% decline matched its Q2 performance. Year to date, comparable-store sales are down 0.7% at Wa-Mart U.S. Management is not projecting much improvement for the key holiday quarter, either: Wal-Mart U.S. expects flat comparable-store sales.
No help from Sam
The Sam's Club discount warehouse business has not been much help, either. Through the first three quarters of the year, comp-store sales for Sam's Club (excluding fuel) were up just 1%. That represents a significantly worse performance than its top competitor, Costco (NASDAQ: COST ) .
While Costco uses an unusual reporting calendar, a few statistics can highlight the difference in performance. For the 16 weeks ending Sept. 1, Costco's comparable-store sales (excluding fuel) grew 5%, both in the U.S. alone and globally. Costco's comparable-store sales growth remained around 5% for September and October as well.
The key takeaway is that while economic headwinds are a big problem for Wal-Mart, they aren't the only problem. The warehouse segment is the only part of Wal-Mart that has an equivalent competitor, and Sam's Club is struggling even though Costco continues to grow steadily.
Nothing to cheer about here
Theoretically, Wal-Mart's size could be a huge competitive advantage, as it has unrivaled purchasing scale. However, the company may simply be too unwieldy to manage at this point. Whatever the cause, Wal-Mart seems to be drifting along with the U.S. economy, which over time could leave it at the mercy of more nimble competitors like Costco and Amazon.com.
Needless to say, I don't think investors should have Wal-Mart on their shopping lists. The stock is not especially cheap at 15 times current-year earnings, and the company is wholly reliant on share buybacks to drive EPS, as organic earnings growth has slowed to a crawl. Until Wal-Mart finds a way out of this morass, I would stay away.
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