Store improvements, wage gains by its core lower-income shoppers spurred sales
Wal-Mart Stores Inc. (NYSE: WMT), the world’s biggest retailer that dominated the retail world for more than five decades, announced its Q1 FY2016 on May 19th, 2016. The Company posted a nearly 1% unexpected increase in Q1 revenue to $115.9 billion, including overseas stores and its Sam’s Club warehouse chain. However, profits declined to $3.08 billion, or $0.98 a share, down from $3.34 billion, or $1.03 a share, in the year-ago period.
“We are focused on building the e-commerce capabilities to drive growth to a higher level and deliver the seamless shopping experience for customers they desire. Another highlight is the improved inventory position that contributed to strong cash flow performance,” said Doug McMillon, who took over as CEO and President in February 2014.
The target customers for Wal-Mart are mainly lower-income shoppers who spend roughly 18% of their income at the chain. During the quarter under review, sales growth was spurred by store improvements and wage gains of about 4% by its lower-income shoppers. Wal-Mart’s shares jumped 9.6% to $69.20 on Thursday, May 19th 2016, according to Reuters’ data.
Competition from online merchants
Wal-Mart has joined a host of U.S. brick-and-mortar retailers in fending off intense competition from online merchants like Amazon.com Inc. (NASDAQ: AMZN) and fast-expanding dollar store chains. Apart from the threat from online stores, the Company has failed to convert store footfalls into actual profits. While the number of people visiting Wal-Mart stores rose 1.5% last quarter, profit fell 7.8%. Consequently, Wal-Mart has forecasted that heavy investments in its stores and in improving online sales to ward off competition could hurt profits this fiscal year.
On a positive note, Wal-Mart has been spending funds to increase store footfalls, better stocking shelves and providing better wages for its employees. In addition, it has benefited from broad shifts in retail away from some products such as apparel. Wal-Mart gets more than half its U.S. revenue from food and groceries. Its sizeable grocery sales make Wal-Mart less dependent on apparel than other department stores such as Macy’s Inc. (NYSE: M), and Target Corp. (NYSE: TGT), which recently cited a pullback by U.S. shoppers last quarter for disappointing results.
Wal-Mart’s Chief Finance Officer, Brett Biggs, said over a conference call, “While some clothing retailers have stumbled recently, Wal-Mart’s apparel business fared well because it focused on affordable basics, not fashion-forward clothes.”
Wal-Mart U.S. delivered positive comp sales for the seventh consecutive quarter, up 1.0%, driven by the sixth consecutive quarter of positive traffic, up 1.5%. Its grocery-focused store called Neighborhood Market (43,000 square feet) comp sales increased approximately 7.1%. Customer experience scores continued to deliver good performance. Net sales at Wal-Mart International increased to $28.1 billion and operating income improved to 22%. Globally, on a constant currency basis, e-commerce sales and GMV increased 7.0% and 7.5%, respectively. Excluding currency swings, Wal-Mart’s global revenue rose 4%. The strong dollar and a weak performance in the UK caused international sales to fall by 7.2% to $28.1 billion in Q1 compared with a year earlier.
E-commerce proving a laggard
Wal-Mart had not been able to cut prices of its products due to costs associated with recent wage hikes and investments in e-commerce aimed at closing the gap with Amazon.com. Deceleration in Wal-Mart’s e-commerce business is a cause for concern; the Company’s 7% constant-currency growth in e-commerce is down from 8% growth in the fourth quarter and 17% growth in the year-ago period. As a remedial measure, the Company is investing billions of dollars in setting up new fulfillment warehouses to speed up delivery times and increasing the number of products sold on its Walmart.com website.
On Monday, May 16th, 2016, Wal-Mart announced that it had signed an expanded sourcing deal with McKesson. The deal is aimed at driving efficiencies and lowering costs for the retailing giant. Bucking the trend of lackluster guidance from other U.S. retailers, Wal-Mart predicts a sales growth in Q2 at its existing stores. Q2 EPS guidance stands at $0.95 to $1.08, versus estimates of $0.98 a share.