Wal-Mart (WMT) reports its Q4 fiscal 2013 earnings on Feb. 21, and we expect its international segment to be the key growth driver as the U.S. growth has remained relatively stable. Revenues from international markets have increased by an average 15% annually over the last couple of years due to aggressive expansion and Wal-Mart's low price advantage.
On the other hand, the retailer's revenues in the U.S. have grown at an annual rate of just 1% during the same period. Although this trend is likely to continue, a good performance during the weak holiday season in the U.S. and the updated layaway program should help its U.S. results, which remain significant and account for just over half of our estimate for Wal-Mart. Additionally, we'll watch out for Wal-Mart's future expansion plans in international and the U.S. markets.
Expect Slow Growth for Wal-Mart U.S.
Wal-Mart's revenue growth in the U.S. has been fairly stable since 2007, averaging around 3% annually. In the last couple of years, the growth was well below this average as Wal-Mart slowed down its expansion in the country. The retailer opened only 113 stores during 2010-11 compared to 300 stores opened during 2007-09. We expect this trend to continue in fiscal 2013 as Wal-Mart reaches saturation in many markets, as evident from its slowing expansion, in the U.S. and risks cannibalizing its sales.
Holiday Sales and Updated Layaway Program Might Offer Little Help
Last year, Wal-Mart improved its layaway program to encourage customers to shop more during the holiday season. Under its layaway program, Wal-Mart allows customers to buy merchandise with 10% down payment and pay the remaining amount in 60 days. In comparison to its 2011 layaway program, Wal-Mart increased the payment time frame by 30 days, eliminated the cancellation fee, and started offering a full refund on the opening fee (fee paid when a customer opens a layaway account). Moreover, it increased the product categories in this program, which were earlier limited to electronics, toys and jewelry.
The layaway program along with the one hour in-stock guarantee (an attractive deal offered if a product is sold out while the customer was in the store between 10:00 p.m. and 11:00 p.m. on Thanksgiving day) helped the retailer report its best ever Black Friday events. The retailer stated that its stores made 5,000 item transactions per second. Furthermore, Wal-Mart performed well during the weak holiday season in the U.S. with its EDLP strategy and attractive holiday deals.
International Growth Will Be in Focus
With less than 30% of overall revenues, Wal-Mart's international segment accounts for about 40% of its stock value according to our estimates. Emerging markets provide significant scope for expansion for the retailer along with a huge pool of value conscious customers and its proven business model. As Wal-Mart faces an increasingly saturated domestic market, we believe the majority of its growth will come from international markets.
In Q3 fiscal 2013, Wal-Mart reported 7.6% revenue growth from its international business as it gained retail market share in various international markets. Of these, Brazil, Mexico, and China still remain the key international markets for Wal-Mart. In the last two quarters, Brazil's revenues and comparable sales increased by an average of 10% and 5%, respectively, while Mexico's grew by 10% and 4%.
However, Wal-Mart is having some troubles in China with its local strategies (see "Wal-Mart Struggles With Local Strategy In China"). Although Wal-Mart China's revenues increased by 6% in Q3 fiscal 2013, its comparable sales were up by just 0.4%. The retailer is looking to strengthen its position in the region by centralizing management, cuttings costs, improving operational efficiency and expanding efforts to gain price leadership. Wal-Mart also acquired a 51% stake in Yihaodian, a China e-commerce retailer, to improve its online sales in the region.
Updates on Expansion Plans
Apart from revenue growth, we will closely monitor updates on Wal-Mart's expansion plans in domestic and international markets. The retailer had planned to open 20-25 smaller format Wal-Mart Express stores in the U.S. in Q4 fiscal 2013. Since these stores are Wal-Mart's pilot program and have performed well, it will be interesting to see how the retailer goes ahead with its expansion.
Last year Wal-Mart decided to slow down its expansion in Brazil and Mexico to build a strong foundation for comparable store sales growth. Furthermore, the retailer also reduced the number of new stores in China scheduled to open in the latter half of fiscal 2013. Any change in these expansion plans will play a vital role in deciding Wal-Mart's growth in these regions.
Our price estimate for Wal-Mart stands at $80, implying a premium of about 15% to the market price.
Disclosure: No positions.