U.K. sales drop drags on Wal-Mart’s shares
Top retailer’s key challenge in U.S. is flat grocery business, analyst says
Shares of mass merchant Wal-Mart Stores Inc. sank almost 4.4 per cent Tuesday after the giant U.S.-based retailer reported lower-than-expected profit and soft same-store sales on its home turf.
The world’s biggest retailer continues to face pressure from Amazon.com Inc., traditional grocery chains and warehouse club retailer Costco Wholesale Corp. Wal-Mart shares were down 6.9 per cent this year before Tuesday.
“Based on recent surveys, we know that many of our U.S. customers are using their tax refunds and the extra money from lower gas prices to pay down debt or put it into savings,” chief executive Doug McMillon said in a quarterly investor call on Tuesday.
“They are also using these funds for everyday expenses like utilities and groceries. That’s where we can be their destination of choice. We’re not where we want to be in every store, but I’m pleased with the progress that I’m seeing.”
Same-store sales, an important measure of retail health that tallies performance at established stores, rose 1.1 per cent in the U.S. and 1.8 per cent in Canada amid the exit of Target Corp. — the fourth consecutive quarter of positive same-store sales in this country. But same-store sales in the U.K. fell 3.3 per cent.
Wal-Mart is a longtime economic bellwether for the U.S., which accounts for more than 70 per cent of the company’s operating income, said analyst Brian Yarbrough of Edward Jones in St. Louis, who rates the shares a hold.
He said Wal-Mart did pretty well in October and November when gas prices started declining because investors figured its lowend consumer base would spend the savings in its stores.
“Unfortunately, we just haven’t seen that occur,” Yarbrough said.
One of Wal-Mart’s key challenges in the U.S. is its flat grocery business, the analyst added.
“Grocery is over 50 per cent of their business and it is where they have added market share over the years, but more recently they have struggled with that,” he said.
In the U.S., competing chains have lowered their prices to be more competitive with Wal-Mart, which also battles dollar-store chains in the canned and packaged goods areas. “Walmart has never been known for convenience, but customers would go there because they would save 15 per cent to 20 per cent,” Yarbrough said. “Now at five per cent to eight per cent, people just aren’t willing to put up with the inconvenience.”
In the meantime, the Sam’s Club division has had sluggish samestore sales in the low single digits while rival Costco’s same-store sales have been in the range of six to eight per cent.
Wal-Mart’s net profit fell to $3.34 billion US, or $1.03 US per share, in the first quarter ended April 30, from $3.59 billion US, ($1.11 US per share), a year ago. Analysts were expecting an average profit of $1.04 US per share, according to Thomson Reuters.
Revenue fell slightly to $114.8 billion US from $114.96 billion US due to the effects of a stronger greenback, but international sales fell 6.6 per cent to $32.4 billion US.
“Aside from the vagaries of currency, sales at Wal-Mart’s international division have been pulled down by a weak performance in the United Kingdom,” said Neil Saunders, chief executive of Conlumino, a New York-based retail research agency and consulting firm.
“(Wal-Mart’s) Asda banner has seen total sales fall by 3.3 per cent and same store sales by 3.9 per cent, largely thanks to extremely tough competition in the market and the rise of discount supermarkets like Aldi. Asda is not alone in its woes; most other UK grocers have also suffered sales slips in a deflationary market with very little volume growth.”