Katy Askew

Comment: Wal-Mart fails to capitalise on Target weakness

By Katy Askew | 3 February 2014

Wal-Mart sees US sales miss expectations

Wal-Mart sees US sales miss expectations

News Wal-Mart has lowered its full-year earnings forecast reflects more than the drag of store closures as it adjusts its international portfolio. The US retail giant is struggling to grow its top-line at home and lower fourth-quarter comparable domestic sales suggest it  failed to capitalise on the data breach scandal that hit key competitor Target Corp., Katy Askew suggests.

Wal-Mart lowered its fourth-quarter and full-year profit forecast outlook on Friday (31 January).

The US retailer had previously said it expects underlying fourth quarter earnings per share to total US$1.60-1.70, with full-year EPS anticipated to come in at $5.11-5.21. Including the previously announced impact of store closures in China and Brazil and the group's move to exit its Indian joint venture, Wal-Mart had forecast fourth-quarter EPS to total $1.50-1.60.

However, in a surprise announcement, CFO Charles Holley said the company now anticipates earnings to be "at or slightly below the low end of our range".

The company said earnings will be hit by a number of additional items. Wal-Mart has been the subject of scrutiny in Brazil over its tax bill. It is contesting some of the rulings but has set aside resources to cover the payments. The retailer said it has also received a "significant increase" in employment claims in the country, which will lead to further charges.

In China, costs linked to store closures will hit its bottom line. In the US, restructuring and store closures at its Sam's Club warehouse chain will also affect earnings. In total, these new items are expected to reduce earnings per share by $0.15.

However, perhaps more telling was the revelation sales from Wal-Mart's namesake and Sam's Club stores in the US are now expected to come in below expectations.

"For the 14-week period ending January 31, 2014, we expect both Wal-Mart US and Sam's Club comp store sales, without fuel, to be slightly negative to the guidance provided in our third quarter report," Holley said. "Walmart US guidance on November 14 was for comp sales to be relatively flat, and Sam's expected comps, without fuel, to be between flat and 2%."

The implication, then, is that Wal-Mart's US same-store sales are in decline.

Holley attributed this weaker-than-expected performance to two factors: "First, the sales impact from the reduction in SNAP [the US government Supplemental Nutrition Assistance Program] benefits that went into effect November 1 is greater than we expected. And, second, eight named winter storms resulted in store closures that impacted traffic throughout the quarter."

However, it is worth noting Wal-Mart is operating in a US retail environment where sales have actually entered an upward curve. According to figures from the Department of Commerce, retail sales rose 0.4% in November and 0.2% in December. Wal-Mart's decline would therefore suggest that the US retailer is losing share to rivals.

As William Blair Equity Research analyst Mark Millar says: "Reduced expectations appear to be top-line driven, as management indicated comp-store sales at both Wal-Mart US and Sam's Club are tracking below plan.

"The company cited the reduction in SNAP (i.e. food stamp) benefits and adverse weather trends as headwinds to results. Additionally, we believe market share loss to competition remains the primary first order concern. Wal-Mart comp-store sales continue to lag well below US retail sales, and this trend appears to have worsened further in the fourth quarter."

Wal-Mart's failure to deliver top-line growth in an up market is a concern. However, its failure to deliver growth at a time one of its chief rivals - Target Corp. - was hamstrung by a data breach scandal is of further concern still.

Last month, Target warned of larger-than-expected losses in its fourth quarter as it revealed a data breach in December may now have affected 70m customers.

Target forecast a drop in fourth-quarter comparable sales of 2.5%, as consumers avoid shopping at the retailer in response to the scandal. The breach saw hackers steal the personal information of its shoppers, including names, phone numbers and mailing addresses, it said.

The news should have been welcome relief for Wal-Mart - but it would appear the group has failed to pick up Target's lost shoppers.

Wal-Mart's incoming CEO Doug McMillon, who took up the reins on Saturday, clearly has his work cut out of him if he is to get the retailer's US sales moving in the right direction.

Sectors: Financials, Retail

Companies: Target Corp, Wal-Mart

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