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Walmart Pinned at Neutral

Zacks Equity Research

We maintain our Neutral recommendation on Wal-Mart Stores, Inc. (WMT) following appraisal of its first quarter fiscal 2014 results. Top-line growth coupled with productivity improvement was offset by weak consumer spending in the quarter.

Why the Reiteration?

Walmart posted first quarter earnings of $1.14 per share, which increased 4.6% from the prior-year earnings. Top-line growth coupled with cost savings boosted earnings. The first quarter fiscal 2014 results were within the company’s earnings guidance range of $1.11 to $1.16 per share.

Total revenue climbed 1.8%, driven by membership and other income. Total e-commerce sales also grew more than 30% in the first quarter.

However, both earnings and sales missed the Zacks Consensus Estimate due to weak consumer spending during the quarter, primarily caused by payroll tax increase. Payroll taxes in the U.S. increased 2% since Jan 2013, which hurt lower- and middle-income segment consumers. In addition, delay in tax refunds, prolonged cold weather and lower-than-expected price inflation of grocery items led to a disappointing quarter.

Overall, we are impressed with the company’s size and scale of operations. The company’s significant exposure in the international markets makes it the largest retailer in the world. The company has 8,500 stores in 15 countries, under 55 different names. Walmart also continues to expand internationally especially in the emerging markets through accretive acquisitions, new store growth and positive comparable store sales.

Further, Walmart has also been focusing on expanding its online business. While Walmart U.S. and Sam's Club have focused on the e-commerce market in the U.S., Walmart International has explored the international e-commerce markets in countries outside the U.S., primarily the United Kingdom, Brazil and China.

The company has increased its share in Newheight Holdings Ltd, a holding company that owns Chinese Internet retailer Yihaodian, to approximately 51% during fiscal 2013. Walmart plans to grow its retail square feet and expand its e-commerce capabilities further in fiscal 2014.

However, Walmart has always remained under media scrutiny due to its size and scale of operations. Walmart is currently facing bribery allegations and lobbying charges for its operations in Mexico, China, India and Brazil, which has severely hurt investor confidence.

Moreover, the recent debate to increase the minimum wage of workers to at least $12.50 per hour from a minimum wage of $8.25 per hour is becoming a concern for Walmart. This will make it harder for Walmart and other big box stores to pass on the wage hike as a price increase. In response to this, Walmart has even warned that it would scrap plans for three of the six stores it had hoped to build in Washington if the bill becomes law.

Walmart continues to expect decline in consumer spending going ahead as middle-class consumers struggle to cope with rising gas prices, delayed income tax refunds and higher payroll taxes. Additionally, Walmart remains exposed to unfavorable foreign currency translations due to its considerable international presence. Moreover, we remain cautious about the rising costs, which keep us on the sidelines.

Walmart holds a Zacks Rank #3 (Hold).

Other retailers that are presently doing favorable business include Ingles Markets Inc (IMKTA), Kroger Co. (KR) and SuperValu, Inc. (SVU). While Ingles Markets holds a Zacks Rank #1 (Strong Buy), Kroger and SuperValu carry a Zacks Rank #2 (Buy).

Read the Full Research Report on WMT

Read the Full Research Report on SVU

Read the Full Research Report on KR

Read the Full Research Report on IMKTA

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