Proactive investors

Additional information

Additional	Information
Market:	NYSE
Sector:	Retailers
Epic:	NYSE: WMT
News:	Latest news
Web Site:	Wal-Mart Stores, Inc
Other Articles:	29-09-200920-08-2009

Wal-Mart's customers are doing more with less

by Fat Prophets

Wal-Mart’s customers are behaving cautiously towards their spending habits and are taking the company’s motto – do more with less – a little too literally.

The American consumer is still feeling the pinch of the GFC and continues to scale back on spending. Walmart’s (WMT) second quarter result demonstrated that their customers are behaving cautiously towards their spending habits and are taking the company’s motto – do more with less – a little too literally.

We ‘traffic-lighted’ Walmart recently (FAT172) and put the case that the county’s biggest retailer was a defensive stock as budget-conscious customers turn to the discounter in greater numbers during tough times. At that point, comparable store sales were on a positive but steady increase averaging 2.4% per quarter for the last 8 quarters at Walmart US stores. Then came the July 2009 quarter.

Official statistics showed retail spending in the month of July had declined by 0.1% (-1.6% at department stores). Walmart’s quarterly sales for the period to 31 July declined by 1.2% (excluding fuel sales) for stores open more than a year. Fortunately, the company controlled its expenses well and as a consequence, operating income increased by 1.2% on the prior comparable period to $5,882 million on total sales of $100,910 million.

This was achieved on total US floor selling space that increased by 0.6% in the period. The same trend of less space in the discount stores (-2.5%) is being more than offset by increased space in the Supercentres (+1.2%) and the Sam’s Club stores (+0.2%). International store selling space also continues to rise with a further 1.5% added in the quarter. The Supercentres continue to comprise the dominant part of the US floor space with 73.4% as at the quarter end.

In Walmart’s international businesses, an improving trend in comparable store sales was seen in Mexico and the UK. The Asda supermarket business in the UK reported same store sales growth of 7.2% compared to 8.4% in the first quarter, excluding fuel and the recently reduced value added tax. Overall, international sales fell 5.1% to $23,965 million while operating income fell 6.2% to $1,143 million. Adjusting for currency fluctuations, international profit would have increased by 13%.

Walmart has focused heavily on containing its inventory levels to avoid excess discounting and pressure on profit margins. President and chief executive, Mike Duke, said the company will accelerate its focus on reducing expenses in a sales environment “more difficult than we expected”.

The company noted that more people were paying with cash than credit cards. This could indicate that not only are fewer items being purchased, but smaller ticket price items are filling customers’ baskets. As a further sign of consumers’ reticence to spend, the Sam’s Club sales decline of 3.2% might indicate that bulk buying of goods is also being reined in by the family budget.

In aggregate, US retail sales have fallen 8.3% in the past year, suggesting that Walmart’s experience is perhaps better than its industry peers. But concerns over the rate at which the US economy recovers will weigh on retailers especially as they struggle to match their own levels of buying with expected sales. As a further example of the problems retailers face, consumers are demonstrating a change in behaviour towards buying later in the season rather than earlier.

Important approaching events on the US retail calendar include the ‘back to school’ and holiday seasons (Thanksgiving, Christmas), which will provide further insight into the well-being of the consumer. Further depressing the state of consumers’ minds will be the on-going uncertainty over their jobs.

To access more complimentary research reports from Fat Prophets click here.

Register here to be notified of future Wal-Mart Stores, Inc articles. View all Fat Prophets articles here