In order to respond to the challenging retail sales environment, retail giant Wal-Mart Stores Inc. (WMT - Analyst Report) outlined its capital expenditure, expansion plans, and outlook for fiscal 2015 at its annual meeting held on Oct 15.
Focus on U.S. Stores; International Growth to Slow Down
Walmart’s international growth initiatives are expected to slow down as the company is currently trying to improve the domestic sales environment and boost the performance of its U.S. stores, which have been struggling due to an uncertain economy.
Accordingly, Walmart announced the closure of 50 underperforming stores in the emerging markets of Brazil and China, which represent about 2% - 3% of its sales in each of these markets. The closure of these stores is expected to improve productivity. The company also aims to cut costs in the face of increasing competition.
Walmart plans to accelerate the development of smaller-format stores in the U.S. instead of supercenters. Out of the 235 to 265 stores planned for fiscal 2015, Walmart plans to open 120 to 150 small stores in the U.S. For fiscal 2014, the company expects to open about 245 stores.
Walmart now plans to open 34 million square feet of new store space in fiscal 2014, down from its original forecast of 36 million to 40 million square feet. For fiscal 2015, it targets 33 million to 37 million in new store space, with more than half of the space allotted for Walmart U.S.
Sales and Expenditure Outlook
Walmart expects challenging sales environment as well as currency headwinds to hurt sales in the second half of fiscal 2014. The company expects net sales for fiscal 2014 to be in the range of $475 billion - $480 billion, which represents year-over-year growth of 2% to 3%. However, it expects improving economic conditions for fiscal 2015. Walmart expects fiscal 2015 sales to increase faster than fiscal 2014 on the back of improving labor market conditions, improved merchandising plans, new stores and e-commerce initiatives. The company also expects its online sales to reach $10 billion in fiscal 2014 and rise to $13 billion in fiscal 2015.
However, Walmart has lowered its capital expenditure forecast for fiscal 2015 and plans to spend $11.8 billion to $12.8 billion, down from $12 billion to $13 billion forecasted for fiscal 2014 and $12.9 billion spent in fiscal 2013. This is in accordance with its plans to reduce expenditure and improve sales in the U.S.
The company expects lower consumer spending due to higher income taxes, gas and food prices, and the government shutdown. Walmart expects a tough holiday season ahead.
It is thus trying to be more aggressive in terms of discounts. The company has lowered the prices of several of its products and will offer a discount booklet for Sam’s Club members beginning Oct 30 to boost sales early in the fourth quarter.
We note that the company has been suffering from declining same store sales since the past two quarters. Moreover, the retail giant slashed both its revenue and earnings expectations for fiscal year 2014 at its recently concluded second quarter fiscal 2014 earnings announcement on Aug 15. A challenging retail environment in the U.S. as well as in most international markets due to cautious consumer spending continues to hurt its top line.
Despite the short-term concerns, we are impressed with the company’s initiatives to reduce operating expenses. In addition, the company has been expanding its e-commerce business. However, gloomy consumer spending going ahead, currency headwinds, inventory issues and continued economic pressure are concerns. Walmart holds a Zacks Rank #4 (Sell).
Retailers that are presently doing favorable business include Supervalu Inc (SVU - Analyst Report), Spartan Stores Inc (SPTN - Snapshot Report), and Whole Foods Market Inc. (WFM - Analyst Report). While Supervalu holds a Zacks Rank #1 (Strong Buy), Spartan Stores and Whole Foods carry a Zacks Rank #2 (Buy).