Online Revenue Can't Fix Wal-Mart's Near-Term Growth Issues

Jun.23.14 | About: Wal-Mart Stores, (WMT)

Summary

Wal-Mart’s revenue growth has slowed significantly, in recent years.

Online sales are growing fast but won’t contribute meaningfully to growth, for several years.

Declining U.S. same store sales are dragging Wal-Mart's growth rate lower.

Smaller format stores could be key to reigniting Wal-Mart’s growth.

In the last several years, Wal-Mart's (NYSE:WMT) revenue growth has slowed.

Annual Growth Rate

Calendar Year

2007

2008

2009

2010

2011

2012

2013

Revenue

8.4%

7.3%

1.0%

3.5%

5.9%

5.0%

1.6%

Click to enlarge

Online Sales Alone Can't Fix Wal-Mart's Growth Issues. The table above shows, Wal-Mart's revenue growth declined dramatically in 2009 and 2013. Wal-Mart's 2009 decline in revenue growth can mostly be attributed to the recession. However, Wal-Mart's 2013 decline can't be attributed to the recession. The global economy isn't growing fast but it has emerged, from the recession.

In the early stages, Wal-Mart made a major mistake underestimating and under-investing in online retail. However, Wal-Mart's attitude has changed and they have been investing heavily to improve the online shopping experience. These investments are starting to payoff. According to Internet Retailer's Top 500 Guide, Wal-Mart's online sales were $10 billion, in 2013. Wal-Mart's 2013 online revenue grew 30% and they expect the same, for 2014. With an estimated 30% growth rate, Wal-Mart's 2014 online sales will only be able to increase revenue by 0.63%. Wal-Mart's current online sales are too small to significantly impact revenue growth. This issue won't change anytime soon.

Online Revenue Growth Scenario

Online Sales

(Billions)

Incremental Revenue

(Billions)

Annual Growth

Contribution

Total Revenue

2013

10

476

2014

13

3

0.63%

479

2015

17

4

0.84%

483

2016

22

5

1.04%

488

2017

29

7

1.43%

495

2018

37

9

1.61%

503

2019

48

11

2.19%

514

2020

63

14

2.92%

529

Click to enlarge

Assumptions: 30% Annual Growth Rate, Flat Non-Online Sales

Assuming an unrealistically high growth rate, online revenue will only contribute 1.04% to total revenue growth by 2016. According to Reuters, the retail industry is expected to grow at a CAGR of 3.9%, until 2017. Wal-Mart will need their brick and mortar operations to keep up with the industry's growth.

Wal-Mart Growth Problems Stem From The United States.

U.S. Same Store Sales

Actual Year

Wal-Mart U.S.

Sam's Club

Total

2012

Q1

2.60%

6.20%

3.20%

Q2

2.20%

3.40%

2.40%

Q3

1.50%

3.80%

1.90%

Q4

1.00%

2.50%

1.30%

2013

Q1

-1.40%

-0.20%

-1.20%

Q2

-0.30%

1.70%

0.10%

Q3

-0.30%

0.10%

-0.20%

Q4

-0.40%

-0.10%

-0.40%

2014

Q1

-0.10%

-0.80%

-0.20%

Click to enlarge

Wal-Mart's Comparable Same Store Sales

Over the last several quarters, U.S. same store sales have declined 4 out of 5 quarters. Wal-Mart is the largest retailer in the world. However, the majority of their revenue is generated in the United States. Wal-Mart's United States operations accounts for 71.1% of total revenue. This trend will need to be reversed or Wal-Mart will continue to experience subpar growth.

Ultimately, Wal-Mart's greatest potential area of growth is located internationally. China and India represents close to one third of the world's population. Over the last decade, China and India have developed a sizeable middle class which have shown an increasing level of consumption. In 2005, Wal-Mart's international sales accounted for 19.2% of total sales. In 2013, International sales account for 28.9% of total sales. Wal-Mart's future revenue growth will come from international markets. However, the transition from US to international revenue won't happen overnight. Wal-Mart needs a strategy to reverse the decline, in U.S. same store sales.

Wal-Mart's Brick And Mortar Strategy

Wal-Mart's strategy from their 2014 10K

We're focused on growth by providing customers a unified shopping experience, whether they're in our supercenters for a large "stock-up trip," in our smaller stores for groceries, or on their mobile device at their child's ball game.

Wal-Mart is spending significantly ($12.4 to $13.4 billion) to improve their online and off-line retail experience. Wal-Mart is pushing to open smaller more customizable stores. Regarding 2013 investing cash outflows, Wal-Mart stated in their 2014 annual report "The fiscal 2014 increase was primarily for additional Neighborhood Markets and other small formats in the Walmart U.S. segment." The Neighborhood Markets are more traditional grocery stores. The grocery business is vital to their overall brick and mortar strategy.

The grocery markets are important but the real growth potential comes from smaller customizable stores. These stores allow Wal-Mart to leverage their massive sales and customer database. With their database, Wal-Mart could create customized stores on a micro level. Imagine walking into a local Wal-Mart and items you frequently purchase are always in stock. Additionally, Wal-Mart could use their data to stock inventory which would complement your most recent purchase. This would be similar to Amazon's customers also bought these suggestions. Smaller format stores give Wal-Mart the flexibility to create a better more customized shopping experience.

Customization On Micro Level Could Drive Revenue Higher

Wal-Mart's online growth has been impressive. However, online revenue will contribute less than 1% of total revenue growth, for the next several years. Revenue growth will have to be driven by brick and mortar sales. Wal-Mart's strategy is to offer customers 3 different retail experiences. They have Supercenters, Sam's Clubs, and Markets. Wal-Mart's market type stores give them the ability to make adjustments to their retail strategy on a micro level. These stores should help drive Wal-Mart's revenue higher.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.