A Few Reasons Why You Should Stay Away From Wal-Mart

Wal-Mart's lackluster quarter among many other factors makes it an unattractive investment.

Mar 27, 2014 at 2:46AM

It has become increasingly difficult to attract shoppers to retail stores. Not only are they cost conscious, but they also unwilling to walk up to the stores to make a purchase. Instead, they now prefer to sit back at home and make their purchases online. This has hampered footfall at the mall, resulting in lower sales.

Many retailers have fallen prey to this problem and Wal-Mart (NYSE:WMT) is no exception. Wal-Mart has been facing a number of difficulties in attracting customers to its stores from quite some time now. This was once again proven when the retailer posted fourth quarter results which failed to meet analyst estimates.

A woeful quarter
Although revenue inched up slightly to $129.7 billion from $127.8 billion last year, it could not meet the Street's estimates. The increase in top line was due to growth in e-commerce sales and 105 new small format stores opened in the last year. Also, the company accelerated its marketing efforts during the holiday period in order to lure more customers.

However, these benefits were offset by factors such as severe winter weather, which led to lower traffic as well as store closures. Moreover, consumer spending in the U.S. dropped 0.4% in January in addition to a drop of 0.1% in December. Hence, this shows a weakness in people's spending habits, which led to lower retail sales.

A reduction in food stamp benefits by the government also contributed to customers' unwillingness to make purchases, adding to the woes of the retailer.

Digging further
Wal-Mart witnessed declining sales from the international market, especially the emerging markets. The company has been closing stores in unprofitable regions such as China and Brazil . Additionally, it terminated a joint venture it held in India. As a result, it has incurred huge costs which hampered its earnings. Net income for the quarter plunged 21% to $4.4 billion over last year as rising costs and increased marketing costs took their toll.

Even peer Sears Holdings (NASDAQ:SHLD) has been closing down its unprofitable stores. In fact, it has closed 300 stores since 2010 and plans to continue doing so. The company has been making efforts to restructure its business in order to have a bright future. It launched its "Shop Your Way" program about a year ago, which is now used by more than two-thirds of Sears' customers. The program lets customers earn reward points that can be redeemed on their next purchases.

In fact, Sears plans to launch a parcel drop service which will provide customers the ease of collecting purchases without getting out of the car . It will be interesting to see how successfully Sears manages to lure people into stores with these initiatives.

May or may not benefit
Wal-Mart is also trying to revive its business. Its two key areas of focus have been online operations and smaller stores. Because of the decrease in mall traffic and increasing customer interest in online shopping, the company has been concentrating on its e-commerce operations.

E-commerce is not as sweet as it seems, however, as reflected by the recent quarterly results of several companies. Amazon (NASDAQ:AMZN), the e-commerce giant, posted fourth quarter numbers which failed to please investors. Although its revenue increased by 20%, hitting $25.6 billion, it failed to meet the estimate of $26 billion . Earnings were also below expectations of $0.66 per share, clocking $0.51 per share. Moreover, in addition to a disappointing outlook, Amazon declared its plans of increasing the price of its Prime services

Wal-Mart is also expanding its footprint in the urban areas of the U.S. with smaller format stores. These stores are smaller in size, reducing the company's costs and making them easily accessible. After opening a total of 105 such stores in 2013, the retailer plans to add another 270 to 300 stores during this year . 

My takeaway
Wal-Mart has been posting disappointing numbers for the last four quarters, and expanding when store traffic is decreasing is not a prudent thing to do. Moreover, the decline in food stamp benefits should continue to affect shopping patterns, hampering the company's sales. Therefore, staying away from this retailer is a wise decision.

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Himanshu Poddar has no position in any stocks mentioned. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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