Wal-Mart (WMT: Charts, News), the largest retailer in the world by sales, posted lackluster earnings last week, reporting second quarter earnings of $1.18 per share on revenue of $113.5 billion. Although this beat the Street estimate of $1.17 per share, it missed the revenue forecast of $115.75 billion. Wal-Mart’s revenue was negatively impacted by the strength of the U.S. dollar during the quarter. Excluding the currency impact, sales actually came in at $115.7 billion, barely missing the consensus estimate. This was an 8.3% increase in profit and 4.5% increase in sales from the prior year quarter. Same-store sales at Wal-Mart rose 2.2%. Sales at its wholesale Sam’s Club stores, excluding fuel sales, rose 4.2%. Looking ahead, Wal-Mart expects full-year earnings between $4.83 to $4.93 per share, in line with analysts’ expectations of $4.93 per share.
Wal-Mart also faced difficulties abroad during the quarter. The company is slowing the opening of new stores in China and Brazil, two of its key emerging markets, after the company “made mistakes” and “let profitability slip” in attempt to expand rapidly. The company noted that many stores in China were not standardized, and placed in unsuitable buildings, with multiple levels and “odd shapes.”
The company plans to cut its new overseas store openings by approximately 30%, the monetary equivalent of 115 to 126 U.S. Wal-Mart Supercenters. CFO Charles Holley stressed that the slower openings was not caused by macro slowdown in China and Brazil, or corruption allegations in Mexico.
Wal-Mart was not the only one to back off the lucrative Chinese and Brazilian markets. Wal-Mart’s sales grew 5% in China and Brazil. Its net income increased slightly in China while it posted a loss in Brazil. French giant Carrefour has noted that the “superstore” format needs to be readjusted for the Chinese market, while its weak Brazilian stores may be acquired by rivals this year. British superstore Tesco also scaled back its expansion plans in China.
Analysts believe that large multinational superstores are beginning to focus on smaller stores and e-commerce in emerging markets, to avoid high inventory and real estate costs. The superstore, or “hypermarket” format, is especially vulnerable to downturns, since big box retailers with unsold inventory can collapse far faster than e-commerce giants such as Amazon (AMZN: Charts, News) or eBay (EBAY: Charts, News). Wal-Mart, which also includes U.K.-based Asda, currently generates 28% of its revenue from international markets. International sales grew 7.2% to $32.3 billion, a drop from the 10.9% growth it posted in the first quarter. In Mexico, Wal-Mart is still feeling the aftershocks of the ongoing bribery investigations, which allege that the company paid bribes to obtain store permits six years ago. Wal-Mart is expected to increase its earnings 8.3% annually over the next five years.
The company has continued its plan of aggressively lowering prices to fuel its high volume, low margin business model. The company also expects back to school items, which have been stocked since early July, to boost the company’s third quarter sales as a new school year starts.
Shares of Wal-Mart have performed strongly over the past twelve months, rallying 39% while the S&P has risen 18.5%. The stock trades at 13.4 times forward earnings with a 5-year PEG ratio of 1.8, and is fundamentally undervalued. The stock also pays a quarterly dividend of 40 cents per share – a 2.2% yield at current prices – which has been raised every year since its inception in 1974.
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