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Everyday Low Prices Foster Growth for Retail World Leader
Posted by: Vanina Egea (IP Logged)
Date: February 12, 2014 11:05AM

Wal-Mart Stores Inc. (WMT) is a synonym for low-price product offerings. And, money savingis an appealing idea for customers. In fact, the business model is so successful, that it has turned WMT into the largest retailer in the world. This giant operates over 11,000 stores worldwide and its international operations in 26 countries have positioned the company among the top 3 retailers globally. Furthermore, it is the largest private employer internationally, providing jobs to over 2,000,000 people around the globe.

Wal-Mart´s half total sales consists of groceries, the other half being general goods that range from apparel to technology and home goods. The company operates supercenters and wholesale warehouse clubs, also retail stores, restaurants, discount stores, supermarkets, hypermarkets, and apparel stores.

A Huge- Scale Business

The massive scale achieved by its global business allows Wal-Mart high-volume purchases that result in enormous cost advantages. Thus, the company is able to grow its margins providing a wide assortment of products at ‘everyday low prices’ that competitors can´t afford to offer. Additionally, suppliers eager to access the largest retail sales channel, readapt their merchandise to suit WMT requirements for better value-for-money products.

By these means, this colossus reached annual global sales for over $450 billion, $300 billion of which are generated in the U.S. Hence, in an effort to drive comps at a domestic level, the firm opened Neighborhood Market and Express stores to better approach their core low-end consumers. Thus, the firm expects to gain market share in areas were small-format rivals (mainly the dollar stores) are well established.

Opening the Door of Fortune

As for global expansion, Wal-Mart is focusing on emerging economies to drive further growth. Along these lines, its main target is China where the firm plans to open over 100 outlets between 2014 and 2016. According to the Institute of Grocery Distribution, retail market of China is expected to grow 11% by 2015, while the U.S retail business will only enlarge at a rate of 4.2% in the same period. However a good opportunity for its business, after 15 years in the country WMT is still struggling to achieve the strong position that it has in other markets. Tough competition from Sun Art Retail Group Ltd. (SURRF), the largest hypermarket operator, and the joint venture between Tesco TLC (PSCO) (the largest U.K. retailer) and China Resources Enterprise Ltd. (0291.HK), make WMT´s growth arduous. The company has 3% of China´s market share while Sun Art boasts a large 14%. Nevertheless, the company consistently keeps on the growth path by means of a continuous improvement in the perception of Chinese customers´ preferences and the opening of new stores to reach the scale needed to compete. Low costs of labor in this country benefit the company to a great extent.

A Giant in Motion

Wal-Mart is an unstoppable giant. It went through the economic recession without any declines on its gross margins, which have remained in the range of 23.2%-25.4% over the last eleven years. And it constantly increases shareholders´ value by stocks repurchasing and increasing dividends per share, which have grown at a healthy rate of 15.81% for the past eleven years from $0.36 to $1.81. Wal-Mart stocks trade at 14.20 its trailing earnings compared to the industry median of 18.80. Investment guru James Barrow (Trades, Portfolio) recently increased his holdings in the company by 365.93% further enhancing my bullish feeling about WMT´s future growth.

Disclosure: Vanina Egea holds no position in any stocks mentioned.

Stocks Discussed: WMT, SURRF, PSCO,
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