Will Wal-Mart Stores, Inc Manage a Successful Turnaround?

Will small format stores and e-commerce help Wal-Mart get back on track?

Jun 12, 2014 at 10:00AM
During its most recent quarter, Wal-Mart (NYSE:WMT), once again disappointed us by delivering lower-than-expected results. However, it's clear companies can no longer afford to stick to traditional ways of doing business, so Wal-Mart (along with its industry peers Costco (NASDAQ:COST)(NASDAQ:COST)(NASDAQ:COST) and PriceSmart (NASDAQ:PSMT)(NASDAQ:PSMT)(NASDAQ:PSMT)) is employing new strategies to get ahead.
 
Let's take a look at whether these newly launched initiatives will assist Wal-Mart in successfully combating the factors that are inhibiting its growth.
 
First-quarter results
Wal-Mart reported lackluster growth as it continued to deal with rough times in its core North American market. Both earnings and revenue took a hit mainly due to bad weather conditions that made it difficult for consumers to visit stores. Earnings stood at $1.11 per share, down from $1.14 a share in the comparable period last year. Revenue for the quarter came in at $114.96 billion, falling short of analysts' estimates of $116.27 billion. On top of that, same-store sales for the company's U.S business and Sam's Club declined by 0.1% and 0.5% respectively.
 
What is Wal-Mart up to?
During the first quarter, global e-commerce sales for Wal-Mart witnessed a growth rate of 27% year over year. This is due to the company pursuing various growth opportunities in online business over the last couple of quarters. 
 
Wal-Mart introduced attractive services to enrich the web-based experience for customers. Same-day-delivery services, ship-from-store service, and pay-with-cash facility are some of the initiatives that have increased its online sales. Moreover, to enhance the overall shopping experience for its online customers, the company is investing aggressively in its e-commerce channel; it has acquired 12 technology companies in the last three years, including the latest acquisition of a product search company named Adchemy.
 
In contrast to Wal-Mart's Supercenters, its small-format stores are doing fairly well. Despite brutal weather conditions that affected its Supercenters' sales, comparable sales its Neighborhood Markets (Wal-Mart's small store channel) increased 5% in the first quarter. To capitalize on this extremely critical channel, the company plans to open 270 to 300 such stores in the U.S by the end of fiscal 2015.
 
Earlier, a Credit Suisse analyst, Micheal Exstein, suggested Wal-Mart should buy Family Dollar stores. Since there are already a host of small stores operating in urban areas, acquiring Family Dollar would help the company stave off increasing competition from existing stores.
 
Due to uncertain macroeconomic conditions, Wal-Mart has given a bleak outlook for its current quarter, which is a worrying sign for investors. It forecasts its adjusted EPS to fall in the range of $1.15 to $1.25 per share, compared to $1.24 in the same period last year. The company expects its identical-store sales to remain flat during the quarter.
 
Industry peers
Renowned U.S warehouse club, Costco, reported lower-than-expected earnings during its most recent quarter. Earnings came in at $1.07 per share, up 2.8% from the same period last year. On the revenue front, the company did well as it experienced growth of 7.1% to $25.79 billion. Excluding the unfavorable impact of gas prices, deflation and exchange rate fluctuations, same-store sales for the warehouse retailer rose 6% during the quarter.
 
As part of its plan to enhance its footprint, Costco will open eight new stores by the end of its fiscal 2014. The warehouse club has recently declared a dividend increase of about 15%.
 
PriceSmart recently registered solid double-digit growth in its latest quarter. The company earned $0.93 per share versus $0.82 a share in the year-ago period, coming in ahead of a Zacks estimate of $0.87 a share. Sales jumped almost 11% to $674.4 million while net warehouse club revenue increased 11% to $657.2 million. The company remains optimistic about its growth prospects from the Colombian market, it plans to open three new warehouse clubs in the region by the end of this year.
 
Final thoughts
Wal-Mart once again posted a disappointing quarter as both revenue and earnings missed expectations. The only bright spot was the company's growth in its online business. Since the U.S retail industry is gradually moving toward an Omni-channel format, the company is taking various initiatives to boost revenue streams from its web-based business.
 
Besides spending on e-commerce, Wal-Mart is rightly investing in its small-format stores. Enhancing its presence in urban markets would definitely enable the company to make up for lost sales at its Supercenters. Moreover, I agree with Michael Exstein, and it should acquire Family Dollar to get a grip on this market. Still, it will probably take the company some time before it can turn things around and there should be plenty of better places for your investment dollars. 
 

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Zahid Waheed has no position in any stocks mentioned. The Motley Fool recommends PriceSmart. 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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