Wal-Mart Stores, Inc. (NYSE:WMT) Continues To Adapt To Difficult Retail Environment

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The retail industry is evolving so fast that once trendsetters like Wal-Mart Stores, Inc. (NYSE:WMT) are now struggling to catch up, at least in the e-commerce space. Wal-Mart is in the process of reorganizing its business model, primarily seeking to expand its e-commerce presence to offset competition driven by online retailers such as Amazon.com, Inc. (NASDAQ:AMZN).

As part of its e-commerce agenda, Wal-Mart intends to invest at least $2 billion over a two-year period to build its online business. Additionally, the company is optimizing its stores to use them as online fulfillment centers. Because of its vast store footprint, Wal-Mart believes it can match or exceed Amazon in e-commerce space with robust delivery system relying on its expansive store network.

3Q results highlight

Wal-Mart’s adjusted EPS of $0.99 exceeded the consensus expectation of $0.98 in F3Q2016. However, consolidated revenue of $117.4 billion fell 1.3% YoY, mainly because of adverse forex terms in the international markets.

The chart below captures Wal-Mart’s revenue trend in the last five quarters.

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What’s going on in Wal-Mart reboot journey?

Store optimization

Wal-Mart Stores, Inc. (NYSE:WMT) has identified hundreds of non-performing stores that it intends to close. Some 269 stores will be closed globally with 154 of the stores being closed in the U.S. and a significant portion of the international store closure happening in Brazil.

The planned store closure is aimed at trimming expenses as Wal-Mart looks to save money to invest in e-commerce and other more important programs. Additionally, the store closures are also aimed at simplifying the company’s retail structure. For example, a significant number of the stores to be closed in the U.S. are the Express store formats, a pilot program that Wal-Mart now looks set to undo after years of testing.

Initially, Wal-Mart expects to take some near-term charges related to the store closure, but in the long-term, the retailer should be able to save money that can be invested to drive more growth going forward.

Drive for sustainable growth

Wal-Mart’s top priority is to drive long-term sustainable growth cross its various channels – physical and online. As much as the retailer’s current growth priorities are bias towards e-commerce, it continues to invest to improve physical store performance.

In pursuit of long-term growth, Wal-Mart chiefs are making it clear that they are willing to sacrifice near-term growth on the altar of long-term prosperity. Among other things, Wal-Mart can be seen dropping some experimentations such as Express store strategy to allow it pursue more viable opportunities. Of the 154 stores to be closed in the U.S., 102 of them are Express stores, a move that underscores a dramatic shift in retail format strategy.

Above average growth

Not only is Wal-Mart Stores, Inc. (NYSE:WMT) seeking to drive long-term sustainable growth, the retailer is also keen to grow its revenue and profits at a pace above the industry average. Store optimization, online build-out and simplified purchase processes are some of the strategies Wal-Mart is using to drive above-average revenue and profit growth. In terms of cost, the retailer is keen to match the costs of its online pure-play rivals to allow it offer attractive prices at both its physical and online stores.Wal-Mart is also looking at the declining gas prices as a tailwind as consumers have more money to spend on retail purchases.

Wal-Mart US CEO, Greg Foran, is on record saying that the retailer is focusing more on improving the quality of its core business than its quantity.

E-commerce build-out

Wal-Mart Stores, Inc. (NYSE:WMT) has plans to invest $2 billion to build out its e-commerce business over a period of two years. Overhauling technology infrastructure, setting up fulfillment centers and pushing out online shopping apps are some of the areas that Wal-Mart intends to invest in e-commerce. The idea is to match the technological infrastructure of the likes of Amazon and Target Corporation (NYSE:TGT). Of the $2 billion e-commerce budget, the management intended to spend $900 million in 2015 and $1.1 billion in 2016. Wal-Mart will continue to funnel more funds to e-commerce activities given that rivals are also getting better on that front.

As Wal-Mart works to build-out omnichannel retail channel, the company is also interested in leading the online grocery business. The retailer has noted that not many of its competitors are doing well in grocery business online and it wants to take advantage of the opportunity to lead the space. Grocery thus far has been more immune to the pressures of eCommerce due to the logistical concerns and costs to deliver goods that spoil.

Potential challenges

Data handling risks

Many retailers have had issues with hackers. As Wal-Mart expands online and digitizes many of its processes, it is at greater risk of data breach. The increase in high-profile system attacks means that Wal-Mart needs to maintain a large cybersecurity budget, which can eat into its bottom-line figures. That is because the management fears that a cyberattack can have far-reaching implications in the business.

Currency headwinds

Wal-Mart generates close to 28% of its sales from international markets. With such vast exposure to the global market, the company cannot escape the pressures of unfavorable currency fluctuation.

Acquisition integration

Wal-Mart Stores, Inc. (NYSE:WMT)’s model of growth combines organic and inorganic growth, whereby it acquires strategic assets. However, the risk with buying growth is that integration processes can costly or can grad on for longer period than expected. Inability to complete integration of an acquisition fast enough can delay gains or water down the intended gains.

Shifts in economic conditions

When fuel prices are low as the case presently, consumers have more money to spend on retail purchases. However, when economic conditions tighten, consumer purchasing power tends to decrease, thus triggering sales slowdown.

Media scrutiny

As a leading global brand, Wal-Mart Stores, Inc.(NYSE:WMT) is closely tracked by press and any negative coverage of the company can severely damage its image, undoing many years of investment to build the reputation and the brand. Recovering from negative press can be long and difficult for a company the size of Wal-Mart. However, attempts to protect the brand from unfavorable media coverage can slow down certain implementations, thus preventing the company from achieving its dreams faster.

Shareholder return

Wal-Mart Stores, Inc. (NYSE:WMT) has a plan to return $20 billion to its shareholders over the next two years by way of share repurchases. Spending on buybacks in fiscal 2014 and fiscal 2015 was minimal and it is possible management may sweeten buyback the budget for fiscal 2016, perhaps to $9 billion. It is estimated that Wal-Mart repurchased $3 billion worth of stock in 2015.

Conclusion

The clarity in Wal-Mart Stores, Inc. (NYSE:WMT)’s reboot efforts is encouraging.

Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

Neha Gupta

Neha Gupta has been in the financial space for over six years now. Gupta earned her MBA degree from Symbiosis Centre of Distance Learning in 2009 and her passion for finance led her to pursue Chartered Financial Analyst (CFA) course. She has successfully completed Level II of her CFA. She is a veteran in article writing, which is depicted in her numerous pieces published on SeekingAlpha, Nextiphonenews, InsiderMonkey, MarketWatch, and Techinsider. Her crisp and eloquent writing finds its best place in Researchcows, where emphasis is given on developing rich content for various websites, products, business plans, trainings, and book writing.

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