The Wal-Mart Barometer
August, 2011
Wal-Mart released its second quarter earnings release earlier this morning. The release highlighted some common themes as well as indications regarding recent management focus.
Top-line trends for the company continued, indicating a good quarter. These top-line trends include significant growth in earnings per share of 12% year on year. Sales for the quarter increased 5.5% sequentially, or 2.8% year on year. Overall, a good quarter for the company, with results coming in at the top-end of the consensus range.
The downside related to Wal-Mart’s continued deterioration of its U.S. stores. Sales declined for its U.S. stores for the 9th consecutive quarter. Falling close to 1% year on year, sales for Wal-Mart’s U.S. stores decreased at a higher rate than Wall Street estimates. With Wall Street hoping to see signs of a revenue correction, the company’s U.S. stores remain in neutral (for more detail on challenges for Wal-Mart’s U.S. Stores, please see an earlier edition of the Barometer: Ground Hog Edition). Within its U.S. stores, sales of grocery items increased slightly, likely due to inflation and price increases the industry has experienced in the last few months. Sales in other categories declined.
Non-U.S. growth continued to carry a disproportionate load for the company, with sales increasing 11%. With 39% of revenues outside of the U.S., non-domestic growth has been the reason for the company’s good performance. Yet, there are no indications the company has made any progress on turning around its U.S. business. Management raised its earnings guidance for the remaining portion of the fiscal year. This indicates management’s confidence in their ability to grow internationally and continue to take costs out domestically. The company’s ability to grow earnings faster than revenue potentially indicates a heightened focus on costs in its domestic business as a stop-gap measure. Management’s confidence in their ability to decrease costs must be high, given the economic head winds and uncertainty facing its domestic business.
Wal-Mart’s growth picture in the U.S. remains clouded. The company seems to be experimenting on all fronts. Smaller format stores are beginning to open. The company recently launched a video streaming service to gain additional revenue. After nine consecutive quarters, management has yet to show they are translating into any change in momentum and any reversal in the fortunes of its U.S. stores.
Shareholder pressure may start growing for more drastic actions. In upstream industries, the trend is clear that getting smaller is perceived as the better strategic course. That trend cemented itself with Kraft’s recent decision to split itself in two. For Kraft, one business will now be the cash cow, focused on stable, incremental growth in mature, developed markets. Kraft’s other business will focus on the fast growth of snacks and emerging markets. This trend also represents a new models. Large consumer package goods companies continue to take a portfolio approach, using cash from low growth, developed markets to fund its expansion elsewhere. Wal-Mart has clearly been using a similar approach to fund its international expansion. The Kraft decision represents a different, alternative path.
Will there be pressure to apply this new model downstream in retail? With the clock ticking and more time expiring, management is likely focused on not finding out the answer to this question.
Editor’s Note – please see the Wal-Mart Barometer Page for past analysis of Wal-Mart’s financial releases and background on company performance.
