2 Reasons Why Wal-Mart Will Do Better Than Target in 2014

Wal-mart, Big Lots and Target are considered big box retailers, but only Wal-mart reported positive earnings growth last quarter. What is Wal-mart doing differently?

Jan 8, 2014 at 11:35AM

Size obviously provides Wal-Mart's (NYSE:WMT) primary strength. The scope of the company can alarm observers, but this can also comfort investors who look for diversity in geography and cash flow. Other large-box retailers, like Target (NYSE:TGT) and Big Lots (NYSE:BIG), can't offer that kind of diversity to investors. That's why, despite the fact that Big Lots and Target face the same economic conditions that Wal-Mart does, both have negative earnings growth to show for it while Wal-Mart weathered the storm.

WMT EPS Diluted (TTM) Chart

WMT EPS Diluted (TTM) data by YCharts

Wal-Mart has a huge size advantage
At the end of the third quarter Wal-Mart had nearly $210 billion in assets. On average the company sells $1.3 billion a day. While Target has just entered the Canadian market -- and Big Lots is pulling out of it -- Wal-Mart has operations in the U.S., Africa, Argentina, Brazil, Canada, Central America, Chile, China, India, Japan, Mexico, and the United Kingdom. Wal-Mart's strategy revolves around offering its services at everyday low prices, or EDLP, and this strategy resonates with people all over the world.

Three operating segments
Wal-Mart has organized itself into three distinct operating segments, and each segment represents an additional sales channel for the company. Wal-Mart's segments include Wal-Mart U.S., Wal-Mart International, and Sam's Club. Each one has a different set of strengths and weaknesses that compliments the others in different economic environments. This results in a hedge against economic hardship.

Wal-Mart U.S. includes all of the super-centers, discount stores, Neighborhood Markets, and the other small stores as well as walmart.com, the e-commerce component of the sales vehicle. Wal-Mart U.S. is the largest segment and contributes the greatest amount to the company's net sales. Good thing for Wal-Mart, this segment also has the highest gross profit rate.

Wal-Mart International includes all operations outside of the U.S. In addition to retail, Wal-Mart International also operates restaurants and banks. While Wal-Mart International has a lower gross profit margin than Wal-Mart US, this segment shows the most rapid growth. This growth primarily comes from new stores and acquisitions, which has allowed this segment to grow net sales and operating income at faster rates than other segments.

Sam's Club is the third segment. The segment has growing membership sales, but it has a much lower gross margin due to the nature of the business model.

Each one of these segments provides Wal-Mart with another opportunity to make up for any sales shortfalls through a different business model and customer base.

Diversity in cash flow channels
Unlike Target, which reported negative earnings growth of (77)% for the three months ended Nov. 2, and Big Lots, which reported a (70)% loss per share, Wal-Mart's earnings rose 7%. Wal-Mart attributes the increase to 3.3% year-over-year growth in retail square footage, increasing e-commerce sales, increasing acquisitions, positive membership sales at Sam's Club, and the impact of the 2013 acquisitions, which accounted for $730 million of net sales in the first nine months of the year.

The Foolish bottom line
Diversity is a good thing for your stock portfolio, and it's good for the bottom line of a multinational retail organization, especially when the operation has locations all over the world. Having multiple sales channels inside multiple sales segments provides a way for the company to naturally hedge against business risks that companies like Target and Big Lots remain exposed to. As a result, even when Wal-Mart experiences negative sales growth in the U.S., it experiences positive sales growth abroad, and vice versa. 

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