The U.S. retail industry has been exposed to an economic slowdown and low consumer confidence. Under these trying circumstances, retail giants like Wal-Mart (NYSE: WMT ) , Target (NYSE: TGT ) , and Costco Wholesale (NASDAQ: COST ) have struggled one way or the other. For instance, Wal-Mart recently missed Wall Street's revenue estimates by almost 1%. Does this mean that Wal-Mart's future looks bleak? Let's see what the company is doing to rekindle its growth.
What is Wal-Mart up to?
During the last year, Wal-Mart was able to generate $7.7 billion in revenue through the e-commerce sector. This amount, however, was very nominal as compared to Amazon.com's e-commerce revenue of $61 billion. Wal-Mart CEO Mike Duke recently highlighted the fact that the company should have invested more in its e-commerce segment last year so that it could have capitalized more on the growing e-commerce market.
For this reason, the company is now investing heavily in hiring IT professionals and making improvements in its search engine and mobile apps. As a result, Wal-Mart is expecting its e-commerce sales to reach $10 billion by year-end. As the e-commerce industry has become one of the biggest growth drivers for U.S. retailers, Wal-Mart will continue to expand its online business, thus generating more revenue in the future.
Since the start of this year, Wal-Mart's e-commerce sector has grown by 30%. To grow it even further, Wal-Mart is focusing on the Chinese e-commerce market, which is expected to yield composite annual growth of 32% from 2012 to 2015. Therefore, Wal-Mart has a goal of opening more than 110 facilities in China by the end of 2016. This will make sure that the company is on the right track to grow its e-commerce segment in the world's most populous country, which in turn will help Wal-Mart to catch up with Amazon's market share in China
Apart from increasing its stores in China, Wal-Mart is also shutting down stores that aren't generating a lot of revenue. Under this rationalization process, the company will close up to 50 stores in China and Brazil within the next few months. This move comes as part of Wal-Mart's strategy of decreasing its overall operating costs.
In the U.S. market, Wal-Mart's small-format stores are doing slightly better than its large Supercenters. Same-store sales for these small-format stores rose 3.4% in the most recent quarter. To enhance its income even further, Wal-Mart has plans to expand its small stores to more than 400 by the end of this year.
Wal-Mart has a high return on equity of 23.3%, which is proof that the company is generating healthy profits for its shareholders. Its inventory turnover ratio signifies that it's managing its resources better than Target, but it lags Costco. As Wal-Mart has revised its earnings estimates for the year from a range of $5.10-$5.30 to $5.01-$5.10, its share price has dipped, indicating in slightly lower confidence among investors. This has resulted in a low forward price-to-earnings ratio of 13.8.
As U.S. consumers become wary of economic doldrums, the Consumer Sentiment Index kept on decreasing. In November, the index fell to 72, the lowest since December 2011, indicating that people are still not confident of a full economic recovery. This means that consumers with relatively low income aren't spending that much. This low spending was the main reason behind Target's slow growth in the latest quarter, as the company missed Wall Street's revenue estimates by 0.4%.
Moreover, the company's per-share earnings also fell 50% from the last quarter of the previous year to $0.54 in the third quarter this year. This decline, nevertheless, isn't a big issue because the company is massively investing in Canada where it has opened more than 124 stores. Target's ROE and inventory turnover have also been affected by the retailer's international expansion. Target's earnings per share will temporarily take a hit as it continues to expand internationally in the coming years.
Wal-Mart's other competitor, Costco, also missed its revenue estimates in the latest quarter by 1.1%. However, revenue jumped 6% from the comparable quarter of the previous year to $25 billion. Revenue from membership fees grew 7% to $549 million, while same-store sales climbed by 3%.
When we look at the company's financials, we see that Costco has a high return on equity of almost 18%, which shows that despite its low profit margin it is still generating healthy income for its shareholders. Moreover, the company's high inventory turnover reiterates Costco's strength. All in all, Costco appears to be a slightly better investment than its rivals.
The e-commerce industry is getting more popular day by day as more customers shop online. Wal-Mart has been in the retail industry for quite some time but its main focus has always remained on physical stores. However, this year Wal-Mart has invested in its e-commerce segment, which is certainly going to pay off in the coming years. The company's strategy of closing down low-revenue stores will make sure it keeps its operating costs at bay.
Furthermore, opening facilities in China will give its e-commerce business a much needed boost. But, because the company has revised its earnings estimates for the year, it won't be able to do that well in the near future. The investment in e-commerce needs at least a year before it starts to bear fruits for the company. Considering all of this, Wal-Mart looks to be a better investment for the long run than for the short run.
But can Wal-Mart survive that long?
To learn about two retailers with especially good prospects, take a look at The Motley Fool's special free report: "The Death of Wal-Mart: The Real Cash Kings Changing the Face of Retail." In it, you'll see how these two cash kings are able to consistently outperform and how they're planning to ride the waves of retail's changing tide. You can access it by clicking here.