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Wal-Mart (NYSE:WMT) has suffered a decline in its U.S. stores’ revenue per square foot for the past few years. Although we forecast stabilization, there remains a risk of downside to our base estimates. Below we take a closer look at this risk. Wal-Mart’s main competitors include Target (NYSE:TGT), Costco (NASDAQ:COST), Amazon (NASDAQ:AMZN) and Best Buy (NYSE:BBY).

Our price estimate for Wal-Mart stands at $70.75, implying a roughly 35% premium to market price.

Chart created by using Trefis' app

Self-Cannibalization

Wal-Mart, due to its sheer size, faces a risk of cannibalizing its own sales due to over expansion in the U.S. market. In other words, the company runs the risk of competing against itself. This is an obstacle for the company’s stock as analysts tend to place great emphasis on comparable store sales. As one analysis last year noted:

As the giant retailer adds locations and converts existing discount stores to supercenters, the company is taking sales away from itself. This ‘cannibalization’ is hurting comparable store sales.”

Disconnect with Customers?

According to Howard Davidowitz, a retail expert from Davidowitz & Associates:

The company has made a number of huge financial mistakes because it has lost touch with its customers, Davidowitz says. The company is trying to be something that it’s not by remodeling stores, upgrading apparel, reducing assortments, as well as allowing other low-cost retailers to offer better prices.

Davidowitz adds that centralization of Wal-Mart’s management might have put the company out of touch with customers, and recommends that the company consider regionalization of store management.

Whatever the reason may be, the risk of continued declines in revenue per square foot poses downside to our $70.75 price estimate. You can examine this impact by dragging the trend line in the interactive chart above. Despite the downside risk, we maintain our price estimate at a substantial premium to market price.

Source: Wal-Mart's Revenue per Square Foot: Risk of Downside Remains