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Wal-Mart Stores (WMT)Stock (Food & Beverage Industry, Discount & Variety Stores Industry, Fashion Industry Industry, Retail Industry)
 Since the company positions itself as an everyday low price (EDLP) provider, consumers gravitate to Wal-Mart stores during times of economic downturn. Particularly after the subprime lending crisis and 2007 Credit Crunch, Wal-Mart's low prices attract customers because of lower levels of consumer dispensable income. For example, Wal-Mart's comparable store sales increased by 5% in Q2 2009[3], better than higher-priced competitors like Target (TGT), which suffered from a 0.4% decline in comparable store sales during the same time.[4] Perhaps the biggest concern for Wal-Mart is sustaining growth- its size often limits Wal-Mart's aggressive expansion as new store openings often cannibalize sales from its existing locations. For example, the company attributes a 1.5% decrease in comparable store sales in both 2007 and 2008 to cannibalization of sales.[5] Recognizing this, the company has made plans to decrease square footage growth in the U.S. and adjust its priorities for expansion. As a result, many of its opportunities for domestic sales growth may hinge on new store formats, as well as taking market share from specialty retailers such as Best Buy (BBY) (electronics) or Safeway (SWY) (groceries). Finally, the company has started placing more emphasis upon international sales, as international revenue as a percentage of total revenue has grown from approximately 20% in fiscal 2007 to over 24% in fiscal 2008.[5] Additionally, Wal-Mart plans to expand by an additional 485 units internationally in 2009, roughly 78% of its total planned expansions.[6]
[edit] Company Overview  Wal-Mart operates 7,262 stores across three business segments of retail stores worldwide that offer a wide array of general merchandise including groceries, apparel, electronics, and small appliances.[2] Over 57% of the company's stores are located in the United States, with the majority of international stores located in Central and South America and China.[2] The company focuses on offering everyday low prices (EDLP) across its business segments, which together earned $374.5 billion in revenue in 2008.[7] This represents a 8.6% increase which the company attributes mainly to international expansion.[8] Wal-Mart's largest business segment is its namesake Wal-Mart stores, which account for 64% of the company's revenue.[7] The company also earns revenue through its Sam's Club and international business segments which accounted for 11.8% and 24.2% of the company's 2008 net revenue each, respectively.[7] [edit] Business Segments[edit] Wal-Mart Stores (64% of Revenue, 79.6% of Operating Income)Wal-Mart's 3,550 domestic namesake stores accounted for $239.5 billion of the company's revenue during fiscal year 2008.[5] This represents a 5.8% increase in sales from 2007, a drop from a 7.8% increase in sales a year earlier.[5] This slow in growth coincides with Wal-Mart Stores' mere 1% increase in comparable store sales in 2008, compared to 1.9% in 2007 and 3% in 2006.[5] Wal-Mart blames the slow in growth in comparable store sales to declines in consumer spending, particularly in apparel categories as well as cannibalization caused by new store expansions.[5] Wal-Mart stores earned 41% of their revenue from grocery sales in 2008, with sales of entertainment, electronics, and toys a distant second at 14% of Wal-Mart stores' revenue.[9]. In 2009, the company plans to add 195 Wal-Mart Stores, 170 of which will be Wal-Mart Supercenters.[10] Wal-Mart stores come in one of three traditional formats:
 [edit] Sam’s Club (11.8% of Revenue, 7.4% of Operating Income) Sam’s Club is Wal-Mart’s membership-only warehouse club, the second largest in America after Costco by sales.[14] Under the membership-only system, consumers pay $40 and business owners pay $35 annually for memberships to shop at Sam's Club stores.[13] Like its parent company, Sam's Club main strategy is price leadership. The core customer base of Sam’s Club is comprised of small businesses, including convenience stores, restaurants, offices, daycares and schools, and motels. Sam’s Club management remains focused on growing this foundation and improving its relationships with small business owners. To this end, the company expanded its offerings of office furniture and restaurant supplies in 2006. The company also introduced services geared towards small business, such as prescription drug plans and worker’s compensation claims billing. The company operates 591 Sam’s Club locations nationwide[6], which generated $44.4 billion in total sales during fiscal year 2008.[13] This represents a 6.7% increase in sales from 2007 which is mainly due to a 4.9% increase in comparable store sales[5] and 12 newly opened Sam's Club locations during 2008.[6] Sam's Club stores earn revenue through the sale of bulk brand name merchandise including grocery items, electronics, and furniture, but also sells private-label merchandise under the Member's Mark, Bakers & Chefs, and Sam's club brands. In 2009, Wal-Mart plans to open 25 new Sam's Club locations nationwide.[15] [edit] Wal-Mart International (24.2% of Revenue, 21.7% of Operating Income) Wal-Mart operates international locations of its Wal-Mart and Sam's Club stores as well as other retail and supermarkets in Central and South America, Mexico, Canada, Japan, China, and the United Kingdom.[2] Wal-Mart operates 3,121 locations altogether,[1] which generated $90.6 billion in revenue in 2008.[5] Wal-Mart's revenue from international sales increased 17.5% in 2008[5], primarily due to an 11.6% increase in store locations during the year.[6] As Wal-Mart begins to slow its square footage growth in the US, it is expected to turn to its international locations to continue real estate growth. As a result, the company plans to add 400 new international stores during 2009.[15] [edit] Financial AnalysisWal-Mart earned $374.5 billion in revenue in 2008, a 8.6% increase from 2007.[1] Furthermore, Wal-Mart's 2008 sales represented an approximate 33% increase since 2005.[1] The company attributes its increase in revenues to global store expansions as well as positive annual comparable store sales growth since 1998.[16] For example, international sales helped spur Wal-Mart's growth as sales abroad increased 17.5% in 2008 because of new store openings and increased customer traffic.[5] In 2008, the company operated at a 23.5% gross margin, up slightly from 23.4% in 2007 and 23.1% in 2006.[17] Although Wal-Mart's sales continue to increase, its comparable store sales slumped in 2007 and 2008 primarily because of over-expansion and resulting cannibalization of Wal-Mart's stores as well as weakened consumer spending because of the 2007 Credit Crunch. Domestic comparable store sales increased 1.6% in 2008, compared to 2% in 2007, and 3.4% in 2006.[5] The company estimates that opening new domestic stores led to an approximate 1.5% decline in comparable store sales during 2007 and 2008.[8] As a result, in 2007 the company shifted focus to international expansion, particularly in areas without Wal-Mart stores. In 2007, about 77% of the company's new store openings were in international markets.[6] Furthermore, approximately 75% of stores opened in 2008 were international stores and 485 of 620 new stores planned to open in 2009 are abroad.[6] Wal-Mart's operating income reached almost $22 billion in 2008, a 7.3% increase from 2007.[8] This increase, however, failed to match Wal-Mart's 8.6% increase sales, particularly because of higher operating and expansion expenses in the Wal-Mart Stores and international businesses.[8] In 2008, Wal-Mart Stores operating income increased 5.4%, compared to a 5.8% increase in sales; international sales increased 17.5%, but international net income only grew by 11.8%.[18] Sam's Club stores, however, grew by 6.7% in sales and 9.3% in operating income, because of an increased gross margin and decreased advertising costs.[18] Overall, Wal-Mart's operating expenses as a percentage of sales increased to 18.8% in 2008, up from 18.6% in 2007 and 18% in 2006, which in turn slowed the company's growth in operating income.[17]  [edit] Trends and Forces[edit] Cannibalization Reduces Comparable Store SalesLike any retailer, Wal-Mart’s long term sales and income growth depend in large part on the company’s ability to open new stores and expand into new markets. However, due to Wal-Mart’s size, it runs the risk of cannibalizing its own sales figures, effectively competing with itself for market share. In 2008, Wal-Mart's comparable store sales increased 1.6%, compared to 2% in 2007 and 3.4% in 2006.[5] The company attributes cannibalization for an approximate 1.5% decrease of comparable store sales as the company had oversaturated the domestic market with stores.[5] As a result of overexpansion domestically, Wal-Mart has transitioned to focusing on international expansion to markets with little or no presence of Wal-Mart stores. For example, 77% and 75% of new stores in 2007 and 2008 were opened internationally.[6] Additionally, about 78% of Wal-Mart's planned stores for 2009 will be outside of the United States.[6] [edit] Streamlined Distribution Supports Everyday Low PricesA highly streamlined and refined supply chain system has long been one of Wal-Mart's keys to maintaining its everyday low prices (EDLP), with the company using supply-side margin gains to support the low price leadership that has made it competitive. The company recently completed several initiatives to continue improving its already world-class infrastructure. Wal-Mart restructured its distribution network under what it has called a "network remix". Distribution centers were divided into a high velocity/low velocity configuration, separating shipments of goods with quick turnaround, such as cereal, chips, and paper towels, from other goods. This increased labor productivity at the store level, streamlining truck unloading and inventory restocking, as well as decreasing out-of-stock rates for high velocity goods. Other recent infrastructure improvements include the use of information services and RFID inventory tracking systems, to reduce or replenish inventory, respond to customer demands, and customize unique markdowns per region or per store. On the supply side, Wal-Mart is attempting to shift from purchasing largely through suppliers to more direct relationships with factories. This will help alleviate inefficiencies in its supply chain and make Wal-Mart’s factory base a more manageable size; currently, 20% of factories in the chain supply 80% of goods sold. Wal-Mart is also exploring potential in global sourcing, particularly in food, general merchandise, and apparel, and is evaluating which items should and should not be imported. With these changes in sourcing, Wal-Mart hopes to cut costs, while increasing oversight throughout the supply pipeline, managing its reputation risks, and increasing quality. [edit] New focus on customer segmentsIn 2006, Wal-Mart began a three-year plan to make its stores more relevant to customers and shift away from its previous single-strategy model.[19] The first phase of the plan involved the use of several experimental stores to study specific customer demographics, such as Hispanics, baby boomers, women, urban populations, and more affluent customers. The second year of the plan falls in line with the company's remodeling plans, and largely involves changes in merchandise assortment and store experience. As an example of this segmentation, Wal-Mart's internal research identified around 200 stores where more than 40% of the customer base is 55 years of age or older. These stores will carry more pet supplies, plants, and HBA products, while carrying less children's apparel and shoes. This movement towards tailoring merchandise offerings by region, or even by store, is a marked change from Wal-Mart's previous, one-size-fits-all strategy. This new model may work to bolster Wal-Mart's lackluster same store sales figures. [edit] Low-Income Customers Turn to Wal-Mart in Weakened EconomyWal-Mart's main customer base has a lower-than-average yearly household income of $59,000, versus the overall US average of $65,000. Wal-Mart has found success using its price leadership to take control of the low-end market and grow. However, its reliance on a poorer demographic makes the company vulnerable to the same macroeconomic trends that threaten its low-income customers, including rising health care costs, energy costs, interest rates, and a softening real estate market. These macro factors impact a greater percentage of the Wal-Mart customer's income than they do the average American's, affecting these customer's buying power and, therefore, the company's earning potential. Conversely, because of its position as an EDLP provider, many value-driven consumers navigate to Wal-Mart during rough economic times. Programs like Wal-Mart's $4 Prescription Program attract consumers seeking a break from their economic woes. Launched in September 2006, Wal-Mart offers $4 prescriptions of over 350 generic medications at over 4,000 Wal-Mart locations worldwide.[20] As of May 2008, Wal-Mart's $4 Prescription Program has saved its customers an estimated $1 billion.[20] Wal-Mart's low price proposition is particularly crucial because of lower levels of consumer dispensable income following the 2007 Credit Crunch. For example, comparable store sales of Wal-Mart stores increased by 5% in Q2 2009[21], while comparable store sales at rival competitor Target declined 0.4% during the same period.[22] [edit] Legal risks and public perceptionWal-Mart has faced considerable pressure from a number of politicians, labor groups, and lawsuits, attacking the company on issues such as employee wages and benefits, discrimination, and negatively impacting communities and small business. These actions, which are often well-reported by the media, affect Wal-Mart's reputation, which in turn could affect the company's ability to expand into new areas or attract new customers. A successful lawsuit against the company could have a sizable impact on earnings. The most prominent active lawsuit is Dukes v. Wal-Mart Stores, Inc., an $11 billion class action suit (the largest civil rights class action suit in US history) accusing Wal-Mart of discrimination against 1.6 million female employees.[23] [edit] Competition[edit] Domestic CompetitorsTarget (TGT) is Wal-Mart's most direct competitor, offering a similar range of general merchandise in a similar store format (standard Targets, with limited food offerings, compare to Wal-Mart's discount stores, and Supertargets compare directly to supercenters) and consistently outpacing Wal-Mart in same store sales growth. Target’s major competitive advantage over Wal-Mart lies in its customer base: the average household income for Target customers is about $70,000 a year, whereas the average yearly income for a Wal-Mart customer is only $59,000, below the overall US average of $65,000. Target’s suburban base gives it another advantage over Wal-Mart’s more rural locations: 1.4 million people live within 5 miles of a Target, versus only 380 thousand within 5 miles of a Wal-Mart. Finally, because of its focus on low prices, Wal-Mart has found it difficult to promote higher-quality items or private labels that come in at a higher price point; meanwhile, Target has had success with its quality-at-value-prices strategy among higher-income demographics, where price is not the only influence on sales. This higher-income customer base gives Target more stability than Wal-Mart, particularly as energy costs rise and the real estate market slows. Kmart (SHLD), as the third discount retailer of the "Big Three", has seen steadily declining sales since 2000, losing considerable market share to both Wal-Mart and Target.
[edit] Other RetailersAs a large-scale retailer, Wal-Mart competes with a wide variety of other, specialized retailers, such as Safeway in groceries, Best Buy (BBY) in consumer electronics, and department stores such as Macy’s in apparel and home decor. Wal-Mart’s focus on price differentiation means that these companies, while competing in overall market share, are not necessarily competing for the same type of customer; however, in more volatile or price-sensitive markets, such as consumer electronics, discounters like Wal-Mart are able to leverage their pricing advantage and apply increasing pressure on other retailers. Sam's Club directly competes with Costco Wholesale (COST) and BJ's Wholesale Club (BJ) in the warehouse club sector, where Costco currently has the advantage.
[edit] International CompetitorsWal-Mart's major international competitors are Britain's Tesco, France's Carrefour, and Germany's Metro. Two of these companies have a competing presence in China, the UK, and Japan, with Wal-Mart contending with at least one of them in many of its other markets. Metro also purchased Wal-Mart's German operations in 2006. Tesco has recently begun expanding into the US, with plans to launch small-box format stores in the second half of 2007. As the three largest retailers in the world, Wal-Mart, Tesco, and Carrefour accounted for a combined $600 billion in sales in 2006, roughly 20% of the $3 trillion in sales generated by the top 250 retailers.
 Wal-Mart Stores2004 Data 2005 Data 2006 Data 2007 Data 2008 Data Most Recent Data Available [edit] References
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