Way back in 2013, Wal-Mart (WMT, Financial) had announced ambitious plans to clock $500 billion in sales, with plans to add as many as 265 new stores and capture roughly $10 billion in internet sales by the end of 2016. Is Wal-Mart on its way to achieve those lofty targets? Sceptics would say no. The company has performed dismally in the first two quarters of FY2015, with the third quarter just managing to salvage what would otherwise have been a dubious distinction of reporting a decline in sales rate for four successive quarters. However, there are also some proverbial silver linings to the dark clouds that shroud Wal-Mart, and provided the company pulls up its socks and acts fast, the year 2015 could end in a positive note.
Investment Restructuring Signals Positive Outlook
Wal-Mart, in spite of its recent listless run in the market, is still the largest brick and mortar retail chain in the U.S. After slashing its sales outlook for FY2015 owing to a tough economy, the company now expects an annual growth rate of just about 2-3% with a 2-4% increase in net sales in FY2016. However, the company’s quarterly sales have finally picked up pace, a trend that has brought much needed relief to investors.
After struggling with its online presence for a while, Wal-Mart seems to have finally woken up to the reality of e-commerce. Making a paradigm shift in its investments, the company has announced plans to lower investment in larger stores and invest more in its e-commerce enterprise. Wal-Mart is expected to invest around $1.2-1.5 billion in FY2016 in digital and e-commerce enterprises including the development of technology as well as infrastructure. Further, following market inputs that suggest an increase in customers relying on smaller neighbourhood stores for an array of reasons, the company now plans to open around 240 small format outlets in FY2015 in the U.S. and around 200-220 stores in its ‘Neighbourhood Markets’ format in FY2016. Wal-Mart has also slashed its investment in supercentre stores from 120 outlets in FY2015 to 60-70 in FY2016, consequently lowering its capital spending for such outlets from $12.5-13 billion in FY2015 to $11.6-12.9 billion in FY2016.
The recent announcement by competitor Target to pull out of the Canadian market could also spell good news for Wal-Mart, signalling potential growth in sales for Wal-Mart International. Further, Wal-Mart International plans to continue with its organic growth investments across global markets in 2015, with capital expenses pegged between $3.7- 4.2 billion, again significantly lower than the earlier guidance of around $4-4.5 billion. The company expects to add around 10 to 13 million square feet of new store in FY2016, aiming for sustainable growth in five of its largest markets worldwide. Similar efforts to reign in capital expenditure while continuing to invest in merchandise and membership capabilities are being planned for the company’s Sam’s Club venture.
However, the dealmaker for Wal-Mart in 2015 would be the reduction in oil prices. The $30-40 saved by customers on gasoline is expected to be redirected to retail spending, with discount stores such as Wal-Mart standing to gain the most. Assuming the company would live up to its expectations of 25% growth in online sales in FY2016 and reap the benefits of a reformed investment structure, Wal-Mart could well have a good year ahead in 2015.
Major Challenges
With a restructuring of its investments with a focus on e-commerce and small format outlets, the rate of increase in operating expenditure is likely to overshoot Wal-Mart’s sales growth in FY2016. Consequently, the company is likely to witness a flat operating income in 2015.
Moreover, while Wal-Mart faces growing competition from other discounters such as Target (TGT, Financial), Five Below (FIVE, Financial) and Costco (COST, Financial), the company has to contend with the rise of Dollar (DG, Financial) stores that bleed the company’s sales. Wal-Mart is no longer the ‘King’ in the general merchandising sector and its monopoly over low-income customers is losing grip to dollar stores that are out-pricing Wal-Mart, causing it to lose a considerable share of its customer pool. While sceptics wonder about the wisdom in lower capital expenditure for growth, there is also a case for those who question if Wal-Mart will be the sole gainer of the customers’ gas savings. There is nothing to indicate that the savings from lower gasoline prices would not be spent in Costco, Target or other such stores.
Finally, the company would also have to work harder at improving the walmart.com domain that comes into 2015 with a set of inherited encumbrances to face established names such as Alibaba (BABA, Financial) and Amazon (AMZN, Financial) in the e-commerce sector.
Final Thoughts
With a restructuring of its investments, Wal-Mart can expect to re-gain at least some of its lost ground in the retail market while making new in-roads in the e-commerce sector in 2015. However, the company will have to weather the challenges posed by dollar stores at one end and seasoned e-retailers at the other. Although the company would not have much to offer investors owing to an expected flat operating income, investors would do well to hold on to their shares through to FY2018 when the company’s investment would start to moderate, allowing dividends to trickle through. Overall, the company is set for a tame performance in 2015.
