Can Wal-Mart Offset Weaker Consumer Spend?

| About: Wal-Mart Stores, (WMT)

In our previous article on Wal-Mart (WMT), we focused on the company's downward re-estimation of its revenue growth for this year on account of the weak economic scenario prevailing in the U.S. This situation is raising investors' concerns about Wal-Mart's U.S. earnings going forward. For this, the retail giant is adopting various strategies that will help it sustain in the weak economic scenario, when consumers are cost-conscious. Along with this, Wal-Mart is distributing cash to its shareholders through dividends and share repurchase, enhancing the investors' confidence in its stock.

Sam's club expansion

Sam's Club, a subsidiary of Wal-Mart, is a members only retail warehouse. This store provides merchandise to its members at a discounted price, which is attracting customers to buy from these stores to save money during the prevailing weak U.S. economic scenario. In the second quarter of its fiscal year 2014, Sam' Club's same store sales increased 1.7% year over year. In order to increase the revenue from these clubs, management is adopting various strategies to increase its customer traffic.

Wal-Mart recently has laid down its plan to expand Sam' Club in the U.S. for the fiscal year 2015. The company currently operates 622 Sam' Club stores and will open approximately 17 to 22 Sam's Club stores by the end of fiscal year 2015. Total cost to open these clubs will be around $1 billion. Earlier, it had a plan to open approximately 12 Sam' Club stores in fiscal year 2014 but revised its plan to open approximately 19 to 21 stores in fiscal 2014, on an account of high demand of discounted merchandise in the U.S.

Further, with the holiday season in the focus, Wal-Mart is adding new merchandise on a faster pace than before. In the previous year, it added 52 new merchandise options to its clubs during the holiday season. This year, it is adding 132 new merchandise options, thus enhancing the customer's shopping experience. We believe that Sam's Club's enhanced presence in the U.S. and its strategy to attract customers towards its store, will lead to a top line upsurge.

Sam' Club competitor, Costco Wholesale' (COST), also generates revenue through a similar business model of providing discounted merchandise to its customers. Costco's core business model of membership only retail sales makes it Sam' Club's biggest competitor. Costco has gained enormously in the weak economic environment, as customers are more inclined towards discounted merchandise. Currently, Costco has 637 warehouses globally, and it has accelerated its expansion plans. Costco plans to add approximately 36 new warehouses by the end of 2014. The expansion of its clubs will lead towards more members joining Costco's network, leading towards incremental membership fees.

We believe Costco has a competitive advantage over Wal-Mart's Sam's Club, on account of same store sales. In their recent quarter updates, Costco reported 6% same store sales increase in comparison to Sam's Club same store sales increase of merely 1.7%. Nevertheless, continuous adoption of Sam's Club's various strategies will give Costco Wholesale tough competition during the holiday season, as Costco hasn't changed its strategy for the holiday season. Gaining the investor's confidence by continuous repurchase

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Source: YCharts

Wal-Mart is continuously repurchasing its own shares, which typically increases the earnings per share of the company. Over the last four fiscal years, Wal-Mart has repurchased approximately $36 billion of its own stock. Further, in the second quarter of its fiscal year 2014, Wal-Mart's management authorized a $15 billion share repurchase program with no expiration date. In the same quarter, it repurchased $1.9 billion worth of shares, which was equivalent to 24.2 million outstanding shares. Over the last two years, the company has repurchased approximately 24 million of its outstanding shares per quarter, and assuming it continues to buy back its shares at the same pace, it will increase investors' confidence about the stock. Further, over the last four quarters, Wal-Mart's net income has increased at a growth rate of 2.86% on average, and with the assumption of the same net income growth rate for the coming quarters, the impact of the share repurchase plan on the quarters of fiscal year 2014 is shown below.

Fiscal Year 2014

Net Income


Outstanding shares (billion)


Second quarter




Third quarter




Fourth quarter




Subsequently, the outstanding shares of Wal-Mart are expected to decline each quarter by 24 million. With the reduction of outstanding shares, its EPS is expected to increase by $0.05 each quarter, as calculated above. Wal-Mart's continuous share repurchase activities, with increasing net income, will gain the investors' confidence and will have a have a significant impact on the earnings per share of the company going forward.

Another company from the service sector that is also aggressively repurchasing its own shares is CBS Corporation (NYSE:CBS). Currently, CBS is running a $6 billion share repurchase plan, which started in January 2011. This program is expected to complete by the end of 2014, and as of the second quarter 2013, CBS has returned approximately $3.75 billion through share repurchase. Up to now, the company has repurchased 112 million of its own shares at an average price of $33.41. This had an impact on the EPS, which has increased 24% since the commencement of this program through the end of 2012 and is expected to increase further.

Bottom Line

Wal-Mart is expanding its operations in the U.S. in accordance with the weak economic scenario prevailing in the U.S. This will have a positive impact on the top line of the company on an account of more customer traffic towards its stores. Additionally, the company is returning cash to its shareholders through dividends and share repurchase activity, thus gaining the investor's confidence. Henceforth, this stock is a buy.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Fusion Research is a team of equity analysts. This article was written by Shweta Dubey, one of our research analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.