Wal-Mart Stores Inc. (WMT), world’s largest retail corporation based out of Bentonville, Arkansas, is ready to announce its second-quarter 2014 results on August 14. Despite the retail sector’s decent performance and steady recovery of the U.S. economy, analysts expect Wal-Mart to post lukewarm figures. Let’s take a closer look at what could happen to the retail chain this time.
Revenues could increase
Analysts expect Wal-Mart to generate revenue of $119 billion in the quarter, up 1.8% from $116.9 billion recorded in the same period last year. The company expects its U.S. same-store sales to remain largely flat during the second-quarter 2015. This indicates an improvement over the second-quarter 2014 in which comparable store sales declined 0.3%.
The company’s sales suffered during the initial phase of the year on account of inclement weather. Customers stayed away from outdoor shopping as the extreme winter brought sales down in the first three months this year.
The U.S. retail sector improved significantly during the April-June quarter as the turbulent weather gave way to pleasant conditions. Sales could improve further in the month of July driven by the July 4 weekend. But the overall improvement was mostly on account of growing preference for online shopping, signifying that footfalls in the physical stores are slowing. This may turn out to be a major concern for Wal-Mart, which earns roughly 95% of revenue from physical store sales. Not just Wal-Mart, but retailers such as Bed, Bath & Beyond Inc. (BBBY) and Target Corp. (TGT) that earn 95% of their top line from store sales, are also having a difficult time.
Wal-Mart, in an effort to capture the local market and increase its sales numbers, has opened up several small stores in the U.S. neighborhoods. This could prove to be a good game plan for the company, which isn’t traditionally known for catering to locality-based customers. It plans to come up with several small stores and Supercenters in fiscal year 2015, and has already raised curtains on thirteen Neighborhood markets so far this year.
The company has worked hard in broadening its customer base in the country through expansion but should step up its strategies as Family Dollar Stores Inc. (FDO) and Dollar Tree, Inc. (DLTR) could pose strong competition.
With the opening of additional smaller stores, the accessibility of Wal-Mart’s stores will grow substantially that could push the company’s revenue upside.
Bottom line could plunge
Although revenues for Wal-Mart would possibly climb, earnings could be negatively affected. The company expects earnings per share to range between $1.15 and $1.25, reflecting a year over year decline of 3.2% at the mid-point.
Costs could increase on the back of investments in e-commerce and Sam’s Club membership programs and higher health care expenses in the U.S.
But the company has a solid history of buying back its shares. Last quarter, Wal-Mart bought 8 million shares worth $626 million. Continuous share buybacks could provide some cushion to the company’s earnings per share.
As Wal-Mart’s preparing for a mixed result with declining earnings despite growing revenues, it would be interesting to find out how the company ultimately fares in the second quarter. But the company’s significant free cash flow generation, dividend payouts and share buyback programs could continue to attract investors.