Why Aren't Low Prices Helping Wal-Mart's Revenues?

| About: Wal-Mart Stores, (WMT)

There is an intriguing mystery in the world of revenue right now - why didn't the collapse in gasoline prices help Wal-Mart (NYSE:WMT) avoid revenue losses in 2015?

Standard retail-investing dogma is that when gasoline prices fall, discounters like Wal-Mart see revenue increases because their low-income customers have more cash to spend. Yet, that did not happen at Wal-Mart; the retail colossus saw its revenue fall by $3.52 billion in 2015.

In January 2015, when the average price of a gallon of gasoline in the United States was $2.03 a gallon, WMT reported revenues of $485.65 billion. By January 2016, when the average gasoline price across the nation had fallen to $1.83 a gallon, the company's revenues had also fallen to $482.13 billion.

What is going on here? Why is the nation's largest retailer losing revenue at a time when low fuel prices are putting more cash in its customers' pockets?

Why is revenue increasing at Costco and Kroger but not at Wal-Mart?

One popular theory is that Wal-Mart is making less money from the gasoline it sells. That hypothesis is refuted by a look at the revenues of two other retail giants that also operate hundreds of gas stations, Costco Wholesale (NASDAQ:COST) and Kroger (NYSE:KR).

Between February 2015 and February 2016, Costco saw its revenue increase by $1.63 billion. The club store giant reported revenues of $115.64 billion in February 2015 and $117.27 billion a year later.

Kroger which operates 1,330 supermarket fuel centers and 782 convenience stores saw its revenues rise by $1.36 billion in 2015. Kroger reported revenues of $108.47 billion in January 2015 and $109.83 billion a year later.

It looks as if falling gasoline prices did not affect the revenues at those retailers which operate large stores often in direct or indirect competition with Wal-Mart? That means other factors were affecting Wal-Mart's revenues.

Why Wal-Mart's revenues are falling

A number of other factors are offsetting any gains that Wal-Mart might experience from cheap gasoline prices. These factors include:

  • Losses overseas, particularly in Brazil. Reuters reported that Wal-Mart's overseas operations generated a profit of just 4.5% compared to 7.4% for its US operations. Wal-Mart has closed 60 stores or more than 10% of its stores in Brazil, according to a Reuters report from January.
  • The failure of Wal-Mart Express. The company's dollar-store experiment which failed to stave off the out of control growth of discounters like Dollar General (NYSE:DG) and Aldi. All 102 Wal-Mart Express stores will soon shut down.
  • Store closings. Wal-Mart will close 154 stores in the US including Wal-Mart Express, 12 supercenters, 23 Neighborhood Markets, six Sam's Clubs, seven stores in Puerto Rico and six discount stores. Closing stores reduces revenue and costs money. The closings are also a sure sign of weak stores at some of its locations. To make matters worse, Wal-Mart is also planning to close around 100 stores in other countries including the 60 in Brazil.
  • Runaway growth. Despite the store closings, Wal-Mart is still planning to open 135 stores in the US over the next year including 15 new supercenters and 85 Neighborhood Markets. This means that the company's bloated store count is not shrinking.
  • The growth of online retailers, especially Amazon (NASDAQ:AMZN) which is now effectively undercutting both Wal-Mart and Sam's Club on the prices of many items. I've noticed that prices on some shipping supplies I use for my business are now lower at Amazon than at Wal-Mart or Sam's Club. Since Amazon is far more convenient than Wal-Mart, you can buy stuff without going to a store; this is a huge threat.

  • Efforts to compete with Amazon. Wal-Mart is planning to spend $2 billion on infrastructure designed to position walmart.com to compete with the Everything Store. The spending includes several massive new fulfillment centers across the United States some of which contain up to a half a million products.

  • Experiments in delivery and click and pull designed to compete with Amazon. This includes same day delivery services and the ability to pick items ordered through walmart.com up at stores.
  • Raising the wages of 1.2 million US associates to $13.88 an hour. This move was needed to head off labor unrest, unionization and political pressure to raise the minimum wage to $15 an hour. It also helps Wal-Mart retain employees, and prevent its stores from becoming retail schools where novices learn the business before moving onto higher pay at competitors such as Costco.
  • The increasing ability of a wide variety of competitors including companies as diverse as Kroger, Aldi, Dollar General, Costco and Amazon to match and in some cases undercut Wal-Mart's prices. Customers simply have less reason to go to Wal-Mart, which leads to lower sales and store traffic. To make matters worse, some of these stores offer better customer service and a more pleasant shopping experience. The most dangerous of these is Amazon, which allows people to shop without leaving the house.
  • Wal-Mart's weak brand and lousy reputation with customers create a psychological barrier that keeps a lot of shoppers away. This can seriously damage Wal-Mart now that its competitors, some of which have strong brands and reputations for good customer service, can match or beat its prices on many items.

It looks as if Wal-Mart's problems are now so great it cannot even capitalize upon favorable market trends such as lower gas prices. This retailer will need a major shakeup and serious reorganization if it wants to retain its momentum.

Naturally, many investors will wonder if Wal-Mart is still a value investment. I would say it still is because the company still has tremendous resources and incredible amount of revenue.

Yet, the revenue losses and inability to capitalize upon cheap gas demonstrate that Wal-Mart is no longer the well-oiled retail machine that Sam Walton built. Instead the Behemoth from Bentonville increasingly looks like a retailer that has lost its way.