The former J.C. Penney employee and then founder of US giant Walmart (WMT, Financial), Sam Walton, started the company’s operations with a simple strategy in mind of gaining economies of large scale operations and passing its benefit to its customers. However the recent onslaught of e-commerce players and simultaneous increase in the number of players in the retail sector put competitive pressure on the retail colossus. The company announced its financials for the third quarter ended on 31st October, 2014. Besides strong numbers, the announcement on strategic direction found greater acceptance with the investors.
Strengthening e-commerce
The US retail giant announced an increase in EPS from $ 1.14 last year by 0.9 percent to $1.15 for the quarter ended 31St October 2014. The consolidated net sales increased by 2.8% i.e. $2.16 per share after having a negative impact of foreign exchange fluctuations of $0.12 per share. The operating income decreased by 0.7 % as compared to prior year period. The primary reasons behind the decrease were an increase in the interest cost and capital leases. In terms of the outlook, the EPS guidance for the fiscal year has been revised from around $ 4.90- $ 5.15 to $ 4.92 to $ 5.02 due to negative impact of closure of Japan operations by 0.03 $ per share.
The segment level data highlights that e-commerce sales increased by 21% globally. This has paved the way for the company to move strategically towards e-retailing through a solid web infrastructure development that includes mobile applications as well. In the third quarter and continuing into the fourth quarter, Walmart has invested credible efforts in building a robust e-commerce segment. For instance, the company announced two additional fulfilment centers in Atlanta and Bethlehem in order to support its massive online operations. In the wake of quicker delivery times (promised by online retail giants like Amazon and eBay), this move is particularly impressive because it highlights Walmart’s sustainable foray into e-retail.
Peer study
Globally Walmart faces fierce competition from its peers in each of its revenue segment. Walmart’s only strength remains in the prices of the products it offers, which is also being highly challenged by Kroger (KR) in US. Even Aldi in Germany has beaten Walmart in a survey for 28 products in terms of pricing. The sales growth of Kroger and Costco (COST, Financial) has been 11.2% and 7.39% respectively while Walmart’s sales growth is 2.86% only.
Costco has excelled in paid-membership business model leaving Sam’s club behind even though Sam’ Club leveraged on Walmart’s underpriced products just because Costco has created better customer experience of shopping through kind return policies, accepting several modes of payment and adding gift prizes. Costco has also tried to keep less but worthy brands giving it a better inventory management apart from giving customer a balanced variety of options.
However, in this case as well, the company has taken various steps to ensure growth in operations. The case in point is the Bodega concept in Mexico where instead of large retail discount chains the company has opted for small retail stores to have a better connect with the middle and lower middle class. As this article from NASDAQ reports, the Bodega concept is faring better than the big box concept for Walmart in the Mexican region. As a matter of fact, the smaller mom and pop stores are proving to be better for Walmart in regions including the US because it establishes a link with the middle class. The volume achieved by targeting this class can prove to be highly beneficial to the retailers in the long-run.
Final words
In terms of share price the company returned $0.05 through dividends and repurchase to its shareholders. The company’s EPS is expected to increase at a moderate growth of 5%. The company has huge cash in hand which it might use for repurchase to meet their $15 billion repurchase program as evidenced by their SEC filing. Overall the company may face moderate growth due to its new strategic acquisitions which has the potential to push its price in the near-short term.
