Wal-Mart Stores, Inc
Wal-Mart Stores, Inc. (NYSE: WMT) serves customers and members more than 200 million times per week at more than 8,000 retail units under 55 different banners in 15 countries.
Walmart is under no illusion that the holiday season will be tough
Net sales for Walmart’s third quarter of 2009 were up by 1.1% to $97.6 billion. Income from continuing operations increased 7% to $3.246 billion, above consensus earnings estimates. The retail environment continues to be tough, but Walmart says it gained market share with increased customer traffic in its stores.
Since our initial buy in September, prices have encouragingly pushed higher over the last month. As evident on the daily chart, Walmart has held above the top of the continuation pattern and moved up, which we view as a good sign for further gains in the short-term.
US consumers are still shell-shocked from the GFC. Unemployment is above 10% and could go higher. House prices have begun to stabilise but performance varies greatly from city to city. The stock market has recovered throughout the year but consumer confidence has not.
The backdrop to owning retail stocks remains challenging to say the least.
The recently released October retail sales data showed a lift in sales by 1.4%, ahead of market expectations. As usual though, the detail reveals a fragile state of affairs.
September retail sales were revised down from -1.5% to -2.3%. Excluding October automobile sales, retail sales growth was just 0.2%, the third monthly increase in a row, but barely enough to appease the sceptics.
The downward revision to the September data caught the market by surprise and was perhaps the most notable feature of the release. It suggests that US economic activity is not as robust as the September quarter GDP rise of 3.5% suggested. This figure may now be subject to revision as a consequence.
Walmart has thrown down the challenge to its rivals by saying it intends to be the price leader this holiday season. The company plans to slash prices in its US stores every week until Christmas.
Beginning with Thanksgiving, Walmart has lowered prices on popular toys and groceries, flat panel TVs and will throw in a 12-pound turkey for less than $5, This is well below cost and aims to entice foot traffic through its vast store network.
The company has increased the ante by offering more than 100 toys for $10 each, slashed the price of the most popular books and is offering pre-order DVDs for less than $10.
Walmart is under no illusion that the holiday season will be tough. Its plans to cut prices every week will likely cost it several hundred million dollars, but President and Chief Executive Mike Duke is in no mood to let other retailers set the agenda. He said: “I am competitive by nature and I want to win”.
A consistent theme this year in retail surveys has been the downgrading of consumers’ buying intentions. In both volume and price, consumers are either spending less generally, or buying cheaper versions of their usual purchases. This theme, in our view, plays to the real strength of Walmart. Its purchasing power and influence over its suppliers will enable it to reduce its costs more than its price reductions. In doing so, it should maintain profitability as long as consumers play along.
The risk, of course, is that consumers stay home or spend even less than the company anticipates, thereby leaving it with unwanted inventory.
Walmart plans to lower its cost of doing business at the same time, but this will be a fine balancing act at a time of year when staff costs are normally at their peak.
The third quarter result showed same store sales at US stores (excluding fuel) declined by 0.5%. Same store sales at Sam’s Club grew by 0.1% on the previous comparable quarter. Total sales for the group, excluding club memberships, rose by 1.1% to $98.6 billion.
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