The U.S. discount retail giant, Wal-Mart (WMT, Financial), has been pumping dollars as capex for keeping pace with the constantly changing market dynamics. The retailer’s annual capital expenditure has always been above $12 billion in the past decade, except in 2009 when it was $11.5 billion. It’s important to understand where the company is investing all the money in dollars, as investors might get worried with such unscrupulous investment unless they are put to better use. Capex could create pressure on the cash flow generation which could reduce the return to shareholders, unless used for some solid reasons. Let’s take a dive to assess whether Wal-Mart’s capex is essential to spur growth and to enhance stockholder’s returns.
Comparing the past expenses with those of peers
The company has been able to cut its capex to less than 3% of sales from 4% of sales in the past couple of years. Indeed, the company has been judicious on its spending as Wal-Mart needs to invest even on design and décor of its various other store formats.
While comparing with its immediate peer, Target (TGT, Financial), we find that Wal-Mart has been more prudent in its capital spending than the former. Though Target has reduced its capex considerably after 2008- recession, it’s still at 5% of its revenue because of the ongoing expansion in Canada. Therefore, in front of its major rival, Wal-Mart appears balanced in terms of its capex linked to its scale of operations.
Now let’s check out whether the investment of Wal-Mart is a worthy exercise, and worth speaking on.
The plans to boost future growth
Wal-Mart has projected that the capex for this fiscal year, ending January 31, 2015 could be in the range of $12.4 billion to $13.4 billion. As per the previous forecast in October 2013, this recent expectation is about $600 million higher. Wal-Mart plans to invest more in the U.S. operations than envisaged earlier. This is because the market share of Wal-Mart is slowing depleting in the U.S. where cheaper dollar stores are gaining quick significance.
Wal-Mart expects to utilize almost half of its capital budget on Wal-Mart U.S., around 33% on Wal-Mart International and about 8% each on Sam’s Club, and Corporate & Support. New investments are also likely to be centered around small format stores in the U.S., international expansion, and e-commerce.
As dollar stores are becoming more popular among low end customers, Wal-Mart is in a spree to win over them and thus has emulated two small-store concepts- Express Stores and Neighbourhood markets. The retailer is already working on its target to open 90 to 100 Express stores and about 180 to 200 neighbourhood markets in the U.S. by the end of this fiscal year.
Also, Wal-Mart is looking forward to expand globally, besides in the U.S. It has kept a $1 billion capital budget for its largest international market, Mexico where it urges to open 149 new stores this year. In emerging markets such as China and India, the major investment would be around the area of e-commerce. In the past fiscal year, Wal-Mart invested nearly 20% of its total capex in e-commerce initiatives. The company build a recommendation engine for improving personalized searches, enhanced the mobile shopping experience and broadened the merchandise assortment on Wal-Mart websites. Currently, Wal-Mart operates the e-commerce websites in 11 countries and the e-commerce mode of growth has shown 24% jump in sales in the second quarter of 2015 fiscal year, with phenomenal sales growth witnessed in China, Brazil, U.K. and U.S.
Last word
Wal-Mart’s spending seems to be in line with the changing industry trend and is fortifying its future growth prospects. Hopefully, we should see better financial quarters ahead with much better top and bottom-line numbers as Wal-Mart invests to gain hugely in the upcoming future.
