Is Small Better – Giant Retailer Wal-Mart Seems to Believe So?

Technical Analysis by Rajiv Singh

Tough retail competition, slow job growth play spoilsport

Wal-Mart Stores Inc. (NYSE: WMT), the world’s largest retailer, disappointed investors by posting a third consecutive quarterly US comparable store sales (Comps) fall of 0.3% in the third quarter of 2013. The company’s US Comps fell mainly due to price reductions on televisions and sluggish sales of toys and packaged foods.Surprisingly, Comps of its smaller-format US stores rose 3.40% in Q3. Wal-Mart caters to lower-income customers who have indeed been tight-fisted due to higher payroll taxes and slow job growth. The retailer does not expect thistrend to abate during this holiday period.

On a heartening note, the Arkansas-based discounter reported a 2.80% rise in net income to $3.7 billion compared to the year-ago period. Earnings per share were $1.14, up 6.50% compared to $1.07 last year,and a penny above projections, according to Thomson Reuters. This wasmostly attributed to an aggressive and ongoing share buyback program.The earning per share also reflects $0.01 per share from VIP’s restaurants in Mexico, now under discontinued operations.

The revenue figures were slightly below street’s expectations of $116.8 billion.Consolidated net sales rose 1.60% to $114.9 billion, led by Wal-Mart US with $67.7 billion in net sales. Moreover, total revenue, including membership and other income, was $115.7 billion, up 1.70% from a year ago. Consolidated net sales on a constant currency basis would have increased 2.70% to $116.2 billion, according to the company’s press release on 14 November. Net sales were hammered down by currency exchange rate fluctuations to an extent of $1.6 billion. Membership and other income increased 12.30% versus last year.

Focus on Managing Costs

Wal-Martposted strong operating income across all its segments, with Wal-Mart US growing almost 6.00%, Sam’s Club increasing more than 9.00%, and international up 8.00% on a constant currency basis,according to Mike Duke, President and CEO. Duke added that the company’s most important priority is growing top line sales, including comp sales.

According to its press release on 14 November, Wal-Mart plans to reduce operating expenses as a percentage of net sales by 100 basis points by FY 2017. In this regard, the company’s expense leverage metric improved from last quarter, whileit focuses on managing costs to offer low prices to customers.

Source: Company Data
Source: Company Data

Share Buyback Program

During the third quarter, the company repurchased approximately 23 million shares for $1.70 billion. In addition, the company paid $1.5 billion in dividends. In total, Wal-Martreturned $3.2 billion to shareholders through dividends and share repurchases in the quarter.

The Way Forward

For Q4, Wal-Mart expects EPS to range between $1.50 and $1.60. For the full year, ithas updated EPS guidance to range between $5.01 and $5.11. The guidance mainly reflects global economic trends, including currency exchange rate fluctuations, a competitive holiday season, and a full-year effective tax rate of 31-33%.

To kick-start US sales, Wal-Mart plans to expand its smaller-format stores and those that are closer to cities.It currently has 300 such stores and plans to have 400 by the year-end.Wal-Mart expects its online sales to reach $10 billion this year, or about 2.1% of its total.To compete against retailers such as Amazon.com Inc. and Target Corp., Wal-Mart began its holiday sales earlier than last year and is advertising more heavily.

Technical Analysis on Wal-Mart

Wal-Mart shares are trading above its 9-day, 50-day, and 200-day daily moving averages, which creates strong bullish trends going forward. Momentum oscillator like RSI suggests a Buy at the current level, whereas William %R indicates an overbought territoryfor the stock. MACD is above the signal line again, supporting the bullish trend in the near term. Overall, based on the technical charts, we believe that the stock will continue its upward run with a short-term price target of $81.

Source: Bloomberg
Source: Bloomberg
Source: Bloomberg
Source: Bloomberg
Source: Bloomberg
Source: Bloomberg
Source: Bloomberg
Source: Bloomberg

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