Wal-Mart: North and South of the Border

You might be familiar with Wal-Mart’s presence in the United States, but what about Mexico and Canada, where growth potential is higher and consumers behave differently? Answers provided.

Jul 1, 2014 at 10:16AM
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A lot of attention is paid to how Wal-Mart Stores (NYSE:WMT) is performing domestically, but while the United States is home to 4,686 Wal-Mart store locations, there are 2,597 locations in Mexico and Canada combined. Logically, it would make sense to know how Wal-Mart is performing beyond our borders. 

Challenging global economy
The president and CEO of Walmart International, David Cheesewright, used the phrase "challenging global economy" on the first-quarter conference call. This could be a hint that things aren't as rosy as some people make it seem on a global scale. However, as long as you invest in a strong underlying company at a fair price, it almost doesn't matter what happens in the short run.

Despite the challenging global economy, Wal-Mart reported seeing solid sales and profit growth internationally for the first quarter. This was accomplished by expanding price leadership (offering lower prices to consumers than peers) and providing great customer service. Mexico and Canada are prime examples. 

South of the border
Walmart International reported seeing market share gains in Mexico, where it has 2,207 retail units. In Mexico, Walmex (Walmart stores in Canada and Central America) lowered prices on more than 5,000 items and put a quality guarantee in place  . These aggressive price investments led to sales growth outpacing the market by 400 basis points. Wal-Mart's Mexican small-box stores, Bodega Aurrera Express, and stand-alone pharmacies also delivered double-digit comps growth and outperformed peers in food and consumables.

The bad news is that Sam's Club accounts for 26% of Wal-Mart's revenue in Mexico and has been performing below expectations. In order to fix this, Sam's Club plans on reinvigorating its value proposition by providing a treasure hunt atmosphere. Merchandise differentiation has the potential to lead to increased repeat foot traffic.

Sam's Club is expected to continue to suffer in the near term in Mexico, but the company is optimistic in its long-term prospects. Getting on board here would be cheery, but it's better to see actual results before contributing your optimism for Sam's Club in Mexico.

Fortunately, Walmex is adding general merchandise categories online, and Superama (Wal-Mart's grocery delivery service in Mexico) is still growing. If you look at a bigger picture and include Latin America as a whole (includes Mexico and Central America), Walmex's first-quarter sales increased 1.5% year over year. Operating income didn't grow as quickly, increasing just 0.8%.  That said, sales and operating income gains are still positives. 

Overall, Wal-Mart is a success story with growth potential south of the border, but what about north of the border? Keep in mind that this is where Target (NYSE:TGT) is focusing a lot of its attention and attempting to steal share.

North of the border
Let's first cover Wal-Mart vs. Target in Canada. The front line of this battle is in grocery. Wal-Mart Canada's CEO, Shelley Broader, recently stated that she's not going to stop until she has food in every box (store) in Canada. The following will give you an idea of how focused Wal-Mart is on food in Canada.

In 2008, 30.6% of sales stemmed from food, consumables, health, and wellness. In 2013, that increased to 43% of sales. Wal-Mart also invested $91 million in its Canadian distribution facilities in order to close the time gap between food sourcing and shelving, which leads to increased freshness and more customers.

Overall, Wal-Mart has 390 stores in Canada, and it plans on continued expansion. Target plans on having 133 stores in Canada by year-end 2014, but this will likely only increase the number of stores the company will need to close in the future.

Target has been investing in price reductions, which might lead to increased traffic, but Wal-Mart simply will not allow Target to succeed in Canada. To date, Canadian consumers are fickle about Target due to higher-than-expected pricing and inconsistent merchandising. Wal-Mart doesn't have this problem of winning over the Canadian consumer because it has already been in Canada for 20 years. Not to mention Target Canada has lost nearly $1 billion since opening. Edge: Wal-Mart.

Now for actual results. Wal-Mart's increased price investments led to an increased price gap to competitors. Not only did operating income outpace sales growth, but online sales jumped 134% year over year.

The Foolish conclusion
Wal-Mart is performing well in Mexico and Canada. The company's one weakness in Mexico is Sam's Club, but this weakness is made up for in other areas, which is proven by overall sales growth outpacing the market by 400 basis points.   

In Canada, Wal-Mart has enjoyed an increased price gap over competitors, which likely played a role in its market share gain. This gain should increase in the future once Target realizes the cold reception won't thaw out.

Wal-Mart has a large presence in Mexico with Walmex, and Wal-Mart's Canadian presence is ever-increasing. Combine that with good results and the likelihood of future market share gains,and you have another reason to consider an investment in Wal-Mart.

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Dan Moskowitz has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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