Where Wal-Mart's Top-Line Growth Is Coming From and Why It Matters

Wal-Mart Stores (NYSE: WMT  ) has maintained its steady growth in sales in the past quarter by adding paying members and opening new stores. But has the company improved its growth in sales per store? Let's examine how much of Wal-Mart's growth in sales comes from opening new stores and how much stems from organic growth. Finally, let's analyze the company's performance compared to other leading retail giants such as Target (NYSE: TGT  ) and Costco Wholesale (NASDAQ: COST  ) . 

Retail sales continue to slowly rise
Before we start breaking down Wal-Mart's performance, let's see how the U.S retail market has done so far this year. During the past 11 months, U.S retail sales of general-merchandise stores grew by only 0.6%, year over year. Further, during the third-quarter, general-merchandise stores' sales rose by a slight 1.1%. Using this benchmark, let's see how Wal-Mart has done in the past quarter. 

During the third-quarter, Wal-Mart's sales increased by 1.6%. Moreover, its operating profit rose by 3.6%. The table below breaks down the company's three main business segments: U.S, international and Sam's club. 

Source of data: Wal-Mart website

As you can see above, the company's highest growth in sales was in the U.S -- sales grew by 2.4%. On the other hand, the company's highest growth rate in sales was in Sam's Club -- a 9.2% gain. Nonetheless, the most profitable segment remains Wal-Mart U.S with a profit margin of 7.6%. This means the company's profitability improved on account of Wal-Mart U.S. If this trend persists, this could further improve the company's profitability.

Finally, at first glance, the company's growth in sales in the U.S was higher than that of U.S general-merchandise-stores sales -- another positive sign that Wal-Mart has outperformed the market. But a closer examination reveals that most of the growth is related to opening new stores. The table below summarizes the change in the number of stores in the past quarter. 

Source of Data: Wal-Mart website

As indicated above, the company's highest growth in stores was outside of the U.S with 377 new stores, which account for nearly two-thirds of the rise in the number of stores. After controlling the number of new stores added, we can examine the company's change in its average store sales. 

Source of Data: Wal-Mart website

The table above divides the company's sales in each segment with the number of stores in each quarter. As indicated, all three segments reported a drop in sales per store. On the other hand, only the international segment had a drop in operating profit in the past quarter. This finding suggests the company's growth in sales was solely driven by a rise in the number of stores. Further, the growth in sales was due to the opening of new locations; it was offset by a decline in the average store sales. 

Let's turn to the Wal-Mart's competitors and see how the company has done with respect to its peers. 

Has the competition done any better?
To answer this question, let's consider two of Wal-Mart's competitors: Target and Costco. The comparison will take into account the growth in the number of stores and any change in average store sales. 

The table below shows Target's third-quarter sales, operating profit, and number of stores. The company's revenue rose by 4% and its average store sales by 3%. Nonetheless, Target's operating profit declined by roughly 40%. This means Target has managed to improve its sales per store but not its operating profit. 

Source of Data: Target website

Costco , much like Wal-Mart, had a moderate increase in sales -- a 0.8% gain -- but a relatively high gain in new stores -- a 5% increase. In total, the company's sales per store declined by 4%. Finally, Costco's operating profit per store also declined by a similar rate. 

Source of Data: Costco website

Based on the above, Target has done a bit better than Wal-Mart in terms of growth in sales per store but none of these companies have done better than Wal-Mart in terms of growth in operating profit per store.

Foolish bottom line
Wal-Mart hasn't outperformed its peers in terms of growth in sales in the past quarter. Moreover, it hasn't done any better in improving its sales per store. The company's growth was mostly driven by opening new stores, and the international segment has led the way in this area. Down the line, this could curb its progress and reduce Wal-Mart's profit margin. Therefore, the company's strategy (such as expanding outside of the U.S) could, in the coming quarters, impede its growth in sales, which could pressure Wal-Mart's valuation. 

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  • Report this Comment On December 19, 2013, at 10:18 PM, Vig9er wrote:

    When you open new stores, doesn't it impact existing stores in the area? This would enhance overall growth but temporarily cause same store sales to appear artificially softer. Does your data remove the impact factor?

  • Report this Comment On December 20, 2013, at 5:03 AM, liorc wrote:

    That's a good point. I didn't remove this factor. I also think this is another factor that may have adversely affected same store revenues. Since such an impact doesn't serve well Wal-Mart's investment to open new stores, it should be taken into account.

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