Even though for the past 4 years Wal-Mart has seen annual record revenues, first quarter numbers FY2010 came as a bit of a shock when it showed that net revenue decreased .7% from the same quarter in 2009. In addition, YOY net income remained stagnant at $3.02 billion.
Is the economic recession finally taking a tole on Wal-Mart sales? Even though the company attracts low-income consumers as a result of its rock-bottom prices, these consumers could just be cutting back on spending as a whole in order to save money.
While low-income shoppers are plentiful and have been the backbone of Wal-Mart's customer base for some time, they can be a bit fickle. The households that shop at Wal-Mart are more sensitive to energy prices, changes in the housing market, inflation, interest rates, and pretty much anything else that can reduce a person's disposable income, than the average American. This can obviously impact Wal-Mart, since so many of its customers make less than the national average. With crude oil selling at as high as $75 per barrell (over 50% higher than in January, 2007), having risen to $140+ (Jul 08) and currently $40 (Dec. 08), energy costs could be taking an increasingly large chunk out the wallets of Wal-Mart's primary customers. But this did not impact stock price but stoc price was impacted by inevitable Devastating Depression (2008). Realizing this, Wal-Mart's been trying to tap into new customer demographics for the past year or so. It's introduced higher-end fashions to its stores, upped its offering of organic foods, and tried to pump life into the sluggish home decor segment. None of these moves on Wal-Mart's part, however, have worked very well. Higher-income customers are not as inclined to spend their money at Wal-Mart, where low prices are always number one. The low-price emphasis is all fine and well for Wal-Mart's existing customers, but the company's drilled this message home so well that it's having trouble attracting new, quality-conscious customers. This hasn't seemed to sink in at Wal-Mart just yet; as CEO Lee Scott recently said, "I don't think any customer has a problem buying a white blouse from Wal-Mart."
Walmart is certainly on a growth trajectory, but it's about the only stock that is stalked in this fashion. It's a good company with a simple, but well executed model; but it also receives a lot of attention. That attention is creating competitive pressure to buy, driving the price up to break even with it's fundamentals. I'm busy searching for other simple, but well executed business models with the right fundamentals not receiving as much attention. I figure if it can work for Warren Buffet, why not me?
Hopes of an economic upturn were came to a slowdown when retail companies announced second quarter earnings for FY 2009. Why is this? Simply because consumers still aren't spending money. Many major retail stores have seen a decrease in net sales from a year ago. The world's largest retailer, Wal-Mart, had sales drop 1.4% for the quarter. Other big companies like Home Depot and Target had net sales fall 9% and 2.6% respectively. The Commerce Department announced overall that sales fell 0.1% during the quarter. Companies in the retail industry will suffer in consumers continue cut back on spending.
Signs of an economic recession abound after the subprime lending fall-out, and Wal-Mart, as the nation's top retailer, will suffer. Investors seem to disagree - evidenced by Wal-Mart's still-rising stock price - because they think that Wal-Mart's lower prices will attract more consumers as their spending power declines. But what's really going to happen is consumers are going to spend less, overall. They might keep going to Wal-Mart for groceries, but they'll stop buying DVDs, and furniture, and toys, and all of the other non-necessities that Wal-Mart offers. Ultimately a lack of discretionary income will hurt all retailers. Wal-Mart will not be immune.
Wal-Mart Stores Inc. (WMT) missed March sales estimates, saying it was hurt by Easter (and its accompanying sales) arriving in April this year compared to March last year. Comparable sales for U.S. stores rose 0.6%, well below its 3.3% target, MarketWatch reported.
Wal-Mart Boss Skeptical of Fast Recovery
Meanwhile, Wal-Mart CEO Lee Scott said Monday that he does not expect a quick turnaround for the U.S. economy, which he believes will continue to suffer throughout the first half of the year.
Speaking at the National Retail Federation’s annual conference in New York, Scott said the current downturn also might have long-term effects on consumer spending patterns, representing a fundamental change.
“I’m not necessarily convinced that just when all this liquidity and things hit, if you’re going to have the same immediate desire to go back to consumption and debt,” he said. “There are a lot of young people who have learned what it’s like when you are living on the edge and the bad times come.”
Last week Wal-Mart posted lower-than-expected December sales and cut its fourth-quarter profit forecast, showing not even the biggest retailer on the planet is immune to the current economic turmoil.
Unionization is Wal-Mart's greatest fear, because the company's low prices are dependent on low wage labor (often at minimum wages). Unions have made occasional attempts to unionize Walmart workers, but all have been defeated. However, under an Obama administration, the AFL-CIO has said it is going to press hard for new laws which will make it easier for workers to unionize. Among the new rules, unions will have to give less notice before scheduling a vote of workers on whether to unionize (which gives company management less time to defeat these unionization drives).
Wal-marts stock will not experience the growth it has in the past because of its inability to replicate its business model in foreign markets. As the company has already conquered the US and has no more room to grow in that market, it will need to spend a significant amount of time and money trying to figure out what works and doesn’t work overseas. Wal-marts business model, which has had remarkable success in the US, isn’t doing well in many foreign markets. In recent years Wal-mart has pulled out of Germany and South Korea after several unsuccessful years in those countries. While it has been relatively successful in Mexico, China and Britain it continues to struggle in Japan. Wal-mart has spent more than $1 billion in Japan but still can’t manage to get a hold on the Japanese retail market. Wal-marts future growth will be dependent on its ability to develop unique strategies that adapt to the norms of individual countries rather than implementing its US based business model over and over again.