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Wal-Mart Keeps Underperforming Amazon and Costco

By Andrés Cardenal – Feb 19, 2016 at 4:06PM

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Based on its latest earnings report, Wal-Mart needs to do much better in order to close the gap with Amazon and Costco.

Wal-Mart (WMT -1.93%) reported earnings for the fourth quarter of fiscal 2016 on Thursday, Jan. 18. While adjusted earnings per share came in better than expected, performance remains unimpressive, and Wal-Mart is materially underperforming key competitors such as Amazon (AMZN -1.57%) and Costco (COST -1.40%).

Modest sales growth
Total revenue during the quarter came in at $129.7 billion, a year-over-year decline of 1.4%. This was mostly due to currency headwinds, though, since revenue in constant currency grew 2.2% versus the same quarter in the prior year.

Comparable sales in the U.S. increased by modest 0.6%, this was the sixth consecutive quarter with positive comparable sales in the U.S., and traffic has remained on positive ground over the last five consecutive quarters. While it's good to see Wal-Mart generating consistently positive performance in the U.S., growth rates at home still leave much to be desired. On a more positive note, comparable sales in the Neighborhood Market format jumped by a much stronger 7%.

International revenue was $32.7 billion during the quarter, a decline of 9.7% in U.S. dollars and a 3.2% increase in constant currency. Management said that the company is doing particularly well in Mexico and Canada. Wal-Mart is facing economic headwinds in China, but the business "remains on track" in that country according to management. Brazil, on the other hand, is proving to be an increasingly tough environment, and the competitive landscape in the U.K. is becoming more challenging.

Costco is still the winner in warehouse retail
Net sales excluding fuel at Sam's Club declined 0.1%, and comparable sales in this segment fell 0.5% due to a 1.4% decline in traffic and a 0.9% increase in the average ticket. Wal-Mart fully admits that performance in this division remains disappointing, particularly because of weak food sales outside of the holiday periods last quarter.

Costco is clearly Wal-Mart's biggest competitor in warehouse retail, and Sam's Club is no match to the industry pioneer. Costco announced a 4% increase in constant currency sales during the four weeks period ended on Jan. 31, 2016. When looking at the 22-week period ended on the same date, Costco registered a vigorous increase of 6% in comparable sales excluding fuel and foreign exchange fluctuations.  

Amazon is crushing Wal-Mart online
Wal-Mart reported an 8% increase in global constant currency e-commerce sales last quarter. This is a deceleration versus a 10% increase in the previous quarter and also quite a lackluster performance in comparison to online retail leader Amazon.

Based on data for the fourth quarter of 2015, Amazon registered a powerful increase in U.S. dollar revenue of 22%, while constant currency sales grew by an even stronger 26%. Amazon is not only the undisputed leader in e-commerce, but the company also keeps widening the gap versus Wal-Mart.

Wal-Mart has materially increased its investments in technology to jump-start performance in the very important e-commerce segment. The company is improving its fulfillment capabilities, and now offers online grocery shopping to over 150 locations across more than 20 markets in the U.S. 

Management said in the earnings conference call that many customers are ordering online and on their phones, and then picking up their orders in Wal-Mart's parking lots without ever leaving their cars. Satisfaction among those customers is reportedly in the high 90s, so Wal-Mart seems to be making some progress and adapting to the omnichannel retail revolution. However, the company needs to start delivering better results in terms of sales growth in this crucial area.

Falling earnings and a lackluster dividend increase
Wal-Mart announced a 6.5% decline in earnings per share during the quarter, which was widely anticipated by Wall Street analysts, so adjusted earnings per share actually came in ahead of forecasts. The company raised its annual dividend by 2%, from $1.96 to $2 per share. This marks the 43rd consecutive year in which Wal-Mart has increased dividends, quite an impressive track record. The magnitude of the dividend hike, however, is not something to write home about.

Management is expecting sales to be relatively flat in the coming year, mostly due to store closures and global currency depreciation. Excluding these two factors, Wal-Mart is anticipating a net sales increase of 3% to 4% during the year.

Wal-Mart is doing the right thing by investing in people and technology to jump-start growth, but these initiatives are not generating lots of results at this stage, so the company is materially lagging both Amazon and Costco in important areas such as e-commerce and warehouse retail.

Andrés Cardenal owns shares of The Motley Fool owns shares of and recommends and Costco Wholesale. 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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Stocks Mentioned

Walmart Stock Quote
$129.70 (-1.93%) $-2.55, Inc. Stock Quote, Inc.
$113.00 (-1.57%) $-1.80
Costco Wholesale Corporation Stock Quote
Costco Wholesale Corporation
$472.27 (-1.40%) $-6.71

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