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Is Wal-Mart's Empire About to Fall?

By Bob Ciura - Feb 1, 2014 at 2:00PM

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For the first time in years, Wal-Mart's retail dominance is showing serious signs of weakening.

It seems absurd that the corporate fortress known as Wal-Mart Stores (WMT 1.13%) could ever possibly show signs of weakness. After all, Wal-Mart is the largest retailer in the world, with a market capitalization of $240 billion. Its volume of business is simply staggering: Wal-Mart registered $466 billion in sales in fiscal 2013.

And yet, there are cracks appearing in Wal-Mart's armor. Its customer base is under duress, it's suffering from the turmoil swirling through the emerging markets, and it's now facing a severe public backlash for its employment practices that is pushing shoppers toward one of its major rivals. Wal-Mart's recently issued guidance confirms that its problems are a serious issue. As a result, while just a few years ago it would have seemed ludicrous to ask -- is Wal-Mart's age of retail dominance coming to an end?

Shoppers are voting with their feet
Wal-Mart recently lowered its earnings guidance for both the fourth quarter and full fiscal year, and it expects profits to be below previous expectations for both periods. The company gave several reasons for this. One particularly concerning factor was underperforming stores in the emerging markets. Specifically, China and Brazil are looking extremely weak, which prompted Wal-Mart to close 50 units there.

Indeed, Wal-Mart is struggling in the emerging markets such as China and Brazil, where there are now significant signs of an economic slowdown. That's why investors interested in retailers posting strong growth in developing nations should consider PriceSmart, (PSMT 0.10%).

PriceSmart is a much smaller retailer. It operates just 32 warehouse clubs, but those units are spread across 12 countries. Its focus is on Latin America, and the results speak for themselves. Its comparable-store sales increased 6.7% in December and 7.5% in the most recent quarter. PriceSmart is still growing locations in its key geographic focus: The company will debut a new warehouse club in Colombia that should open in November.

Even Wal-Mart's operations in the United States aren't running smoothly. Despite consumer-oriented economic data, such as retail sales, looking fairly strong over the holiday period, Wal-Mart largely missed out. As a result, the company warned investors that comparable-store sales, which measure sales only at locations open at least one year, will be slightly negative to the guidance issued after its third-quarter earnings report.

This is true at both its Wal-Mart U.S. stores as well as at Sam's Club, where the company announced it would lay off 2,300 workers due to poor performance. This is part of a broader restructuring initiative that will shave another $0.01 per share off fourth-quarter earnings.

Is weather a fair excuse?
Wal-Mart attributed much of its U.S. underperformance to the poor winter weather. It's true that the severe winter storms took a bite out of domestic consumer spending. Of course, it's worth noting that other U.S. retailers must face the same conditions. It's looking more and more like Costco Wholesale (COST 0.95%) is simply grabbing customers away from Wal-Mart.

Costco's holiday comps look pretty solid, even with the poor weather, and stand in stark contrast to Wal-Mart's woes. For instance, in the fiscal quarter ended Nov. 24, Costco grew same-store sales by 3%. On top of that solid performance, Costco announced its comparable-store sales increased another 3% in December, or 5% after stripping out gasoline.

Wal-Mart's dominance is waning
There's little doubt that Wal-Mart is still the retailing king due to its massive size. However, as a result of its poor performance both in the United States and the emerging markets, it appears Wal-Mart's dominance is starting to fade somewhat. This would have been unimaginable just a few years ago, but increasing pressure from competitors and a worsening public image have dealt Wal-Mart some severe body blows.

Wal-Mart isn't expecting great things in its upcoming quarter and is giving investors fair warning. By comparison, PriceSmart is excelling in Latin America, and Costco is showing that not all U.S. retailers are hurting because of the weather.


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Stocks Mentioned

Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
$123.98 (1.13%) $1.38
Costco Wholesale Corporation Stock Quote
Costco Wholesale Corporation
$433.55 (0.95%) $4.07
PriceSmart, Inc. Stock Quote
PriceSmart, Inc.
$75.34 (0.10%) $0.07

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