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Why Wal-Mart Couldn’t Report Adequate Growth in the Second Quarter

August 15, 2014 | About:
Quick Pen

Quick Pen

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America’s largest discount retailer Wal-Mart (WMT) came out with the numbers for the fiscal 2015 second quarter yesterday. While the movement in both the top-line and the bottom-line were in green, the company did not grow as much as it would have liked. Even Wall Street wasn’t much impressed with the digits, and the stock plummeted more than 1% before the market opened. Here’s what went on during the quarter and what to expect in days to come.

Quarter’s numbers
For the three months ended July 31, the retail mammoth reported revenues of $120.1 billion, reflecting a 2.8% surge compared to a year ago. However, the bottom-line growth was not that impressive as the company reported net profit of $4.09 billion, translating into a meager improvement of 0.5% from last year second quarter’s $4.07 billion. Nevertheless, the company was able to deliver EPS of $1.21, meeting street’s expectations.

Same store sales, an essential indicator of a retailer’s performance, remained flat for Wal-Mart U.S. during the quarter. Even the comparable traffic was down 1.1%. However, it’s not just Wal-Mart that had a rough quarter. Several other retailing giants, such as Macy’s (M), Kate Spade (KATE) and many more, reported not up to scratch numbers. In fact, the entire U.S. retail sector experienced a flat quarter, characterized by weak demand and heavy discounting that led to lower margins.

What went wrong
A lot of Wal-Mart’s troubles were caused by the smaller dollar stores such as Dollar Tree (DLTR), Dollar General (DG) and many others. Customers bogged down by the rising cost of living were flocking to these dollar stores, where they were able to get items for a few cents less. Moreover, as pointed out by analysts, customers, who were buying items in small volumes for their daily use, preferred the smaller dollar stores since getting just one or two items from Wal-Mart is hassle prone.

During the quarter, Wal-Mart spent a lot of money in developing itself and also on other nonrecurring items. The company had to part with a sum of $43 million to support costs related to the investigation on violations of U.S. antibribery laws that’s being carried out. Apart from this, expenses from building new smaller stores and in e-commerce increased the total spending. The rising cost, coupled with sluggish consumer demand, painted a not-so-desirable picture for the retail giant.

Rising healthcare costs was another factor that had plagued the company’s performance. More and more employees are signing up to be covered under the company’s healthcare plan, and this has resulted in a sudden increase in the cost. Wal-Mart now expects to part with another $500 million to fund the increased expenses on employee registrations.

Looking forward
As the company reported a drop in comparable traffic for the seventh consecutive quarter, it also pulled down the earnings forecast for the full year. After revising the figure, Wal-Mart now expects full-year earnings to be between $4.90 and $5.15 per share, significantly lower than the previous guidance that ranged between $5.10 and $5.45 a share. For the coming quarter, the company again expects the same store sales to remain flat.

As far as costs go, the company plans to spend $0.05 to $0.07 a share on e-commerce, up from the previous estimates of $0.02 and $0.04 a share. However, the projections for e-commerce growth were lowered from 30% to around 25%. The company understands that online shopping is the future and is looking forward to increasing its spending in the field, despite expecting lower growth.

Parting thoughts
The U.S. retail space is going through a tough time, and the heat is being felt by all players, Wal-Mart being no exception. However, retail analysts are optimistic about the future prospects of the industry and the company in particular. Maybe the year won’t be as pleasing as analysts were expecting earlier. But, Wal-Mart’s current spending will help the company successfully cater to the future needs of its customers. For the long run, the company looks like a good bet.

About the author:

Quick Pen
A seasonal writer with a Management Degree in Finance and interests in automotive, technology, telecommunication and aerospace sectors.

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