Alibaba’s Growing Threat To Wal-Mart

Downgrading Wal-Mart (WMT) stock to underperform this month, William Blair & Co. analyst Mark Miller, as is his habit, dwelled at length on the growing advantage enjoyed by Amazon (AMZN) over big box retailers Wal-Mart and Target (TGT).

Amazon’s merchandise selection and prices increasingly compare favorably to both the bricks-and-mortar presence of Wal-Mart and Target and to the traditional retailers’ websites. Although Wal-Mart continues to dwarf Amazon is overall size, the market share shift that’s occurring is unmistakable (Amazon reported a 23% jump in first-quarter sales on Thursday).

WMT Revenue (Annual YoY Growth) Chart

WMT Revenue (Annual YoY Growth) data by YCharts

But Miller, the analyst, also highlights a growing threat to Wal-Mart – both its domestic business and its international one – from Alibaba, a company known to most U.S. investors as what’s helping to prop up Yahoo’s (YHOO) stock price, as Alibaba prepares for an initial public offering of shares; Yahoo’s is a major holder of the stock.

Few U.S. consumers are aware of Alibaba’s merchandise website, www.AliExpress.com, Miller notes. But the site, which mostly sells very low-priced merchandise, on some notable items also stocked by Wal-Mart and Amazon is offering steep discounts. Miller’s team, which surveys hundreds of items in stores and online across the retailers, found in a recent examination, for instance:

--KitchenAid Classic 4.5-Qt Stand Mixer, which was $299.00 at both Wal-Mart and Amazon, was $199.18 at AliExpress.

--Keurig K10 coffee maker, $99.00 at Wal-Mart and $95.44 at Amazon, was $48.58 at AliExpress.

It’s the lower-price merchandise, however, where AliExpress could post the strongest competition to Wal-Mart, Miller notes:

“At this juncture, relatively few consumers in the United States are aware of AliExpress, and the quality of the product line is significantly lower than that of Wal-Mart. Nonetheless, investors should appreciate that the Internet enables providers of opening-price-point product to reach consumers in new ways.” He goes on about the Alibaba operation: “It is early in the game to discern the ultimate impact, but this might be a larger long-term consideration for Wal-Mart’s international business, which serves a higher proportion of low-income consumers.”

Wal-Mart, Miller notes, has long fought off competition from the dollar store chains, Dollar Tree (DLTR), Dollar General (DG) and Family Dollar (FDO), often matching price locally when it has to on key merchandise. AliExpress represents another and perhaps more serious threat to Wal-Mart from below both in the U.S. and abroad.

Wal-Mart’s U.S. stores have suffered same store sales declines in three of the last five fiscal years. While not growing much, the U.S. operation enjoys the best margins, with operating income equal to 8% of sales. Abroad, there is more growth, but the operating margins are thinner, not quite 5% of sales most recent years.

The combined dollar store and AliExpress threat from below, coupled with increasing competition from above from Amazon and a raft of specialty retailers, puts Wal-Mart in the uncomfortable middle spot and feeling squeezed. Ironically, Wal-Mart was the disrupter from below that helped squeeze Sears (SHLD) into irrelevancy years ago.

WMT Chart

WMT data by YCharts

Over the past two and one-half years, Wal-Mart stock has enjoyed an excellent run as its valuation has risen, measured by PE ratio, and its EPS, aided by stock buybacks, rose nicely.

WMT Dividend Chart

WMT Dividend data by YCharts

Wal-Mart’s long history of substantial and regular dividend increases, with a current dividend yield of about 2.5%, also supports the stock. It’s a well-managed and formidable competitor. But its vast size – nearly half a trillion dollars in annual sales – makes it a target for every up-and-coming retailer the world over. Add Alibaba to that list. To learn more, unleash some financial advisor tools.

Jeff Bailey, The Editor of YCharts, is a former reporter, editor and columnist at the Wall Street Journal and New York Times. He can be reached at editor@ycharts.com. Read the RIABiz profile of YCharts. You can also request a demonstration of YCharts Platinum.

Read more articles about: Company Analysis  amazon   retail stocks   

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