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Wal-Mart Stores (WMT)Stock (Discount Clubs Industry, Fashion Industry, Discount & Variety Stores Industry, Food & Beverage Industry, Retail Industry)
 Wal-Mart's stores offer a wide variety of goods at discounted prices, including groceries and fresh foods, health and beauty aids (HBA), pharmaceuticals, apparel, home decor, and electronics. In the U.S., the company is the largest retailer of groceries and toys, holding an estimated 20% market share in groceries and consumables, as well as about 45% of the toy market. Three major factors influence consumer shopping decisions: 1) price; 2) assortment of goods; and 3) store shopability. Wal-Mart--already a price leader--has made several moves to strengthen its standings in the latter two categories, including reevaluating its supply chain, tailoring store offerings to regional markets, and initiating extensive remodeling throughout its domestic outlets. Wal-Mart has also begun streamlining its infrastructure behind the scenes to further lower operating costs and increase margins. Perhaps the biggest concern for the retail behemoth is sustaining growth. Both Wal-Mart and Target (TGT), its main U.S. competitor, grew 12-13% from 2005 to 2006, but Target grew much more efficiently, generating 4.8% of growth from same store sales, compared to Wal-Mart's 1.9% rate for this key retail metric. Its size often limits Wal-Mart's aggressive expansion as new store openings can cannibalize sales from its existing locations. 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.
[edit] Company OverviewNet sales for Q2 of fiscal year 2009 were $92.0 billion, an increase of 10.4% over Q2 of fiscal year 2008.[1] Income from continuing operations for the quarter was $3.385 billion, an increase of 9.3% from $3.079 billion in the second quarter of fiscal year 2008. [2] Diluted EPS from continuing operations for Q2 of fiscal year 2009 were $0.86, up from $0.75 per share in the same prior year quarter. Net sales for the fiscal year ended Jan. 31, 2008 were $374.526 billion, an increase of 8.6% over fiscal year 2007. Income from continuing operations for the fiscal year ended Jan. 31, 2008 increased 5.8% to $12.884 billion, up from $12.178 billion in the prior year. Diluted EPS from continuing operations for the fiscal year ended Jan. 31, 2008 were $3.16, up 8.2% from $2.92 in the prior year. Wal-Mart ended the year with $5.5 billion in cash after buying back $7.691 billion in stock during the year Wal-Mart divides its overall business into three units: Wal-Mart, Sam’s Club, and Wal-Mart International.
[edit] Wal-MartWal-Mart's 3,550 domestic namesake stores accounted for $239.5 billion of the company's revenue during fiscal year 2008. Wal-Mart stores come in one of three traditional formats:
There is some speculation that Wal-Mart may open some U.S. stores in the bodega (small market) format as part of their efforts to adapt store offerings to local demand. [edit] Sam’s ClubSam’s Club is Wal-Mart’s membership-only warehouse club, the second largest in America after Costco. Sam’s Clubs are also located in Mexico, Brazil, Canada, China, and Puerto Rico. The company operates 591 Sam’s Club locations worldwide, which generated $44.3 billion in total sales during fiscal year 2008, not including membership revenues. 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. In an effort to begin expanding the customer base beyond small business, Sam’s Club began offering more brand name and luxury goods, such as Godiva chocolates. Like its parent company, the main strategy is price leadership; Sam’s Club has been able to maintain a narrow price advantage over competitors in the warehouse club market. [edit] Wal-Mart International Wal-Mart has a number of international holdings, which it either has majority control over or owns outright. These holdings represent 3,121 locations in aggregate and generated $90.6 billion in revenue in fiscal 2008. International sales jumped 22%, pushing operating income up 16%. Wal-Mart's expansions into international markets such as Brazil and China are yielding fruit, analysts have said, and the company saw solid sales growth in the U.K. Wal-Mart's namesake chain had a 0.9% increase amid continued strength in groceries, health and wellness and entertainment. Wal-Mart described Easter sales as "good" despite the holiday's earliness this year shortening the season's selling period. Home-related sales remained weak. Wal-Mart's strong international performance (at stores in Argentina, Brazil, Canada, China, Costa Rica, El Salvador, Guatemala, Honduras, Japan, Mexico, Nicaragua, Puerto Rico and the United Kingdom), with a 5-week sales increase of almost 19%, which might suggest that the economic slowdown in the U.S. has not spread internationally, and also suggests that U.S. companies can remain profitable from strong international sales despite a domestic slowdown.[3]
Mexico was Wal-Mart's first international market, where it opened a Sam's Club outside of Mexico City in 1991. A considerable amount of Wal-Mart’s international expansion has been through acquisitions. The company currently owns a 62% stake in Wal-Mart de México (Walmex); 51% of Central American Retail Holding Company (CARHCO), which has stores in Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua; 53% of Japanese supermarket and general merchandise retailer Seiyu; and 100% of the ASDA chain in the United Kingdom, and the Bompreço and Sonae chains in Brazil. Wal-Mart also has a presence in Argentina, Canada, China, and Puerto Rico, and is currently exploring the possibility of entering India, recently signing a memorandum of understanding with Indian company Bharti Enterprises. 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. Management intends to grow international revenue from 24% of total sales to 30%. As a result of this new focus on international growth, Wal-Mart is carefully evaluating each country's potential value, looking to maximize its return on investment and thrive as much as it has in the U.S. For these reasons, Wal-Mart exited two unprofitable markets in 2006, selling its South Korean holdings in May, and its German business in June.
[edit] ProductsWal-Mart stores carry a wide range of retail products. Unfortunately, the company does not provide breakdowns of merchandise offerings or financial figures by product category; however, in recent reports to investors, Wal-Mart has described its core business to include consumables, health and beauty aids, dry food, pet care, and basic apparel. The company has outlined intentions to expand its customer base through new product offerings, such as flat panel TVs, to fill-in other categories of customer interest. Current focuses for US merchandising are:
[edit] Trends and Forces[edit] Cannibalization risksLike 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. For calendar year 2007, Wal-Mart plans to lower its square footage growth to a 7.5% increase over 2006, representing a 7% increase in domestic square footage and a 10% increase for international stores. This is only a minor decrease from a cumulative 8% increase in 2006, and many industry analysts consider this figure to still be too high. In an effort to reduce cannibalization and increase return on investment, the company has changed its expansion methodology under its “Smart Growth” plan. Over the last five years, growth of capital expenditure has outpaced both sales growth and square footage growth, but with a greater focus on efficient capital allocation, Wal-Mart expects sales growth to outpace the other two figures over the next five years. An example of Wal-Mart’s changing philosophy with regards to expansion is its “three for two plan”. In the past, if a market with two well-performing Wal-Mart stores had the potential to support a third, the company wouldn't have hesitated to open that third store. The two older stores would typically lose 20% of sales, with 50% overall of the new store’s sales coming from other Wal-Mart locations. Now, given the same situation, Wal-Mart's strategy would be to wait until the first two stores have hit a high volume of traffic. The company expects that this more efficient approach to capital expenditure will reduce the overall impact of cannibalization. [edit] Infrastructural efficiency[edit] Streamlined distributionA highly streamlined and refined supply chain system has long been one of Wal-Mart's keys to maintaining price leadership, 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] Dependence on ChinaWal-Mart has substantial dependence upon manufacturers in China and would be vulnerable to a revaluation of the Yuan or any trade disputes between the US and China. [edit] Store remodelling effectsWal-Mart is in the midst of an ongoing “special projects” remodel, with 322 stores undergoing a complete remodel in 2006, 1200 additional department-specific "mini" remodels, and even more full and mini remodels planned for 2007. These remodels are intended to help bolster Wal-Mart’s lagging same store sales numbers, as well as increase traffic. Stores with completed remodels have shown promising sales increases, particularly in the electronics and apparel departments. However, the remodeling process was found to be more disruptive to customers than anticipated, which had a considerably negative impact on stores while the remodel was taking place. Though these remodels are intended to benefit Wal-Mart in the long term, they have been detrimental to the company’s same store sales performance in the short term. [edit] Improving environmental sustainabilityWal-Mart has also begun efforts to improve its environmental sustainability, both to decrease energy costs and to bolster its public image. The company hopes to reduce energy costs by 20% in stores. [edit] New focus on customer segmentsWal-Mart is entering the second year of a three-year plan to make its stores more relevant to customers and shift away from its previous single-strategy model. 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 customer baseWal-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 its market share. 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. The recent federal minimum wage increase could partially mitigate these concerns. Wal-Mart is opening new stores in large, suburban markets that are higher-income than Wal Mart's traditional locations. However, new-door productivity numbers for these stores are declining. The success of other retailers such as Lowe's Companies (LOW), who showed increasing returns in similar areas, suggests that this is a weakness specific to Wal-Mart. Because higher-income consumers base shopping decisions on factors besides just price, Wal-Mart may face difficulties in penetrating these markets due to its brand perception and increased competition. [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. [edit] Competition
 Wal-Mart Stores2004 Data 2005 Data 2006 Data 2007 Data 2008 Data Most Recent Data Available [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. [edit] References
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