The largest global retailer Wal-Mart Stores Inc (WMT) has not had the best of times of late. It has been facing severe challenges since the last few quarters and showing signs of acute weakness. The recently lowered guidance for fiscal 2014 confirms many of these problems. Walmart is scheduled to release its fourth quarter and fiscal 2014 results on Feb 20.
For the fourth quarter, Walmart expects its earnings to be at or slightly below the low end of its previous forecast of $1.60 to $1.70 per share. For fiscal 2014, Walmart expects its earnings to be at or slightly below the low end of its previous forecast of $5.11 to $5.21 per share.
The lowered expectation signals that Walmart is under stress, owing to the restructuring of Sam's Club unit in the United States, food safety allegations, and weakness in the emerging markets, including the closure of stores in Brazil and China.
In addition, the retailer expects its fourth-quarter comparable store sales for its Walmart U.S. and Sam's Club segments to be slightly below its prior forecast. It previously expected same-store sales to be relatively unchanged at Walmart U.S. and flat to up 2%, without fuel, at Sam’s Club. Lower comp sales are due to reduced food stamp benefits under SNAP (the U.S. government Supplemental Nutrition Assistance Program) for millions of Americans and unfavorable weather, which resulted in store closures.
After decades of robust growth, Walmart delivered weak results in all the three quarters of fiscal 2014. A challenging retail environment in the U.S. as well as in most international markets due to cautious consumer spending has been hurting the company's top line.
Weak spending from lower- and middle-income segment consumers is hurting the company's U.S. comparable store sales. Middle-class consumers are struggling to cope with rising gas prices, delayed income tax refunds and higher payroll taxes, which have increased 2% in the U.S. since Jan 2013. The economic strains in the U.S. and abroad are likely to pressurize its low-income shoppers for the rest of fiscal 2014 and fiscal 2015.
Walmart International has been witnessing sluggish comps for the past few quarters owing to weak consumer spending environment and changing consumer patterns. The unit is also the focus of a costly bribery probe. Moreover, it closed about 50 underperforming stores in Brazil and China last year, anticipating sluggish growth in the Brazilian market for the fourth straight year.
Most recently, Walmart announced that it is eliminating 2300 employees, including assistant managers and some hourly workers at its Sam’s Club warehouse division in an effort to streamline its business structure.
Wal-Mart is not the only retailer to cut its workforce. The list includes other retailers like Target Corp. (TGT), Macy’s Inc. (M) and J. C. Penney Co., Inc. (JCP), which are also trimming their headcount. The layoffs announced across the board in the retail sector were the result of weak holiday season sales. We note that the holiday season has been a particularly tough one for many retailers like Wal-Mart because of the competitive promotional environment. These retailers struggled in vain to lure budget-constrained consumers.
Not only this, Walmart has always been under media scrutiny due to its size and scale of operations. Recently, it was found to breach food safety measures in China and had to recall donkey meat products after fox DNA was identified in samples. The sources stated that the company had encountered similar issues in China earlier too when it mislabeled its pork products in 2011.
Walmart is also facing bribery allegations and lobbying charges in Mexico, China, India and Brazil. Walmart has also been accused of violating India’s Foreign Exchange Management Act regulations, in relation to the company’s plan to set up stores in India.
Walmart ended its joint venture with its Indian partner Bharti Enterprises and has put its plans to open retail stores on hold until Indian regulations ease. Not only this, Walmart is being pressurized by labor and consumer groups to take adequate safety measures in Bangladesh, after a building collapsed in Apr 2013 killing more than 1,000 workers.
Though we are positive on the company’s sound long-term fundamentals, the current scenario is alarming for its investors. Walmart holds a Zacks Rank #4 (Sell).
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