The Q1 Wal-Mart Barometer
May 24, 2010
Wal-Mart continues to act as a barometer for the larger economy. As the largest retailer in the world, its business results reflect an early view of future trends taking hold. For leaders, these results can be a window in which successful strategies can be viewed. As an investor, these results can act as both warnings and lights toward greater success. Just as a the diversified conglomerate GE is often looked at as a barometer regarding infrastructure and business to business spending, Wal-Mart can be viewed in the same way with an eye towards the end consumer.
In February, on this blog, Wal-Mart’s fourth quarter earnings results were reviewed. In that review, three trends were identified that are taking hold globally (read the post by clicking here). These trends included changing consumer purchasing behavior, arguing that a segment of consumers felt renewed confidence to begin trading up once more. These trends also included a heightened focus toward emerging markets as the growth platform in this recovery. Wal-Mart’s 1Q earnings release occurred last week, so I took a look to see if the trends identified 3 months ago had strengthened as expected and to see what other trends could be emerging underneath the top-line earnings numbers.
Wal-Mart’s recent earnings strengthens the view that consumer behavior is indeed shifting. Store traffic and same store sales for stores open at least a year in the United States continued to decline. The decrease, at 1.2% year on year revenue, was double market expectations, illustrating that many consumers are increasingly taking their dollar elsewhere. A Standard & Poor’s analyst captured the emerging consensus, “We expect U.S. comp-store sales growth to remain under pressure as consumers begin to trade up and take advantage of more convenient, but higher priced, competitors in a more stable economy.”
A heightened focus towards international markets also strengthened with first quarter results. With US same store sales growth down more than 1%, Wal-Mart’s international division grew revenue by more than 20%. Taking currency into account, this equated to a constant currency store growth of about 9%. Once again, China and Brazil were singled out as growth catalysts. The growth rate in emerging markets for Wal-Mart continues to show a solid track record. In that environment, capital investment and strategic focus will continue to be directed toward these markets, and away from what appears to be an uncertain environment in the United States. For supply chains, this shift will be dramatic as emerging market supply chains will be reconfigured to serve domestic demand.
The third key trend identified in the fourth quarter, and validated last week, is Wal-Mart’s continued use of cost cutting as a competitive weapon. On total sales growth of 5.9%, costs grew at 3.9%. After each successive quarter, the economic recovery strategy being employed starts to emerge; continue to wring costs out, maintain position in the US, plow savings to grow the business in emerging markets. The execution of this strategy continues. A recent initiative recently became public that Wal-Mart is seeking to assume warehouse delivery responsibility in the US supply chain for many of its vendors. Doing so, in essence taking over transportation responsibility up the supply chain, is directed toward lowering fuel costs and extracting more price cuts from its suppliers.
More confident consumers once again trading up, increased focus and capital moving into emerging markets, tightening cost controls in the US are the key strategies being used by Wal-Mart, visible in the earnings releases of the last two quarters.
There are more trends emerging. In conjunction with its earnings release, Wal-Mart reduced its US sales forecast. With the much higher than expected US sales declines, Wal-Mart’s view on US markets is now uncertain. Their response is to announce a new round of discounting to prop up demand in US stores. Such discounting is now becoming widespread practice among leading grocery retailers seeking to hang on to their consumers. With so many leading retailers engaging in this practice, inflationary fears in the broader US economy may quickly give way to industry fears of intensified price cutting. This will have deep implications for the U.S. consumer goods market going forward.
