Wal-Mart Watchers Obsess Over U.S. Growth, But How About Intl’ Margins?
Wal-Mart’s (WMT) fiscal second quarter results were issued yesterday, and it was pretty much like other recent quarters: the retail giant’s U.S. Wal-Mart operation suffered a decline in same-store sales, this time 0.9%, disappointing investors who’re hoping for a turnaround in sales momentum at the company’s main unit.
For all the focus on same-store U.S. sales, one might miss the fact that second-quarter earnings per share were up 12.4%, to $1.09, as massive stock buybacks continue to push per-share results up faster than overall net income; or that Wal-Mart raised its full year fiscal guidance to between $4.41 and $4.51 vs. last year’s $4.18.
Ahead of the results, the Wall Street Journal reported yesterday that U.S. consumers increasingly question whether Wal-Mart does, indeed, have the lowest prices. Without that distinction, of course, Wal-Mart’s competition position – against fellow grocery retailers such as Kroger (KR), fellow hybrid retailer Target (TGT), as well as cheapie-cheap chains like Dollar General (DG) and Aldi – suffers. It clearly isn’t for the charm of its stores that people shop at Wal-Mart.
CEO Mike Duke, knowing what everyone wants to hear, reiterated that he’s committed to delivering same-store sales growth in the U.S. Wal-Mart operation. And there is speculation that the company may we willing to give up a bit of its margin to achieve that growth. In the fiscal year ended January 31, 2011, the Wal-Mart U.S. segment of the company had operating income equal to 7.7% of sales, up – even as overall sales of the U.S. stores were essentially flat – from 7.4% a year earlier, and from 7.1% two years earlier. In other words, Wal-Mart has been successfully milking a mature business for higher margins. Sounds like we should be applauding, rather than carping about sales growth, and perhaps looking elsewhere for improvement.
The company has pretty much saturated the U.S. with its big stores. And it has relatively few of the old-format Wal-Marts – 708 as of January 31 – to convert to the larger, Supercenter format. Even in California, a state more hostile to Wal-Mart expansion than others, the company managed to convert more than 30 old-style stores last year. Good news, but there are fewer left to expand.
But how about those faster-growing international operations? The company opened more than 400 stores outside the U.S. last year. International sales, overall, are rising nicely; 13.9% during the current fiscal year’s first six months. But the margins suck: operating income equal to 5.1% of sales during the fiscal year ended January 31, barely up from 5.0% the prior two years. That seems like lower-hanging fruit than trying to squeeze some growth out of the U.S., a task the company could easily fail at and squander dollars (discounting products further here; over investing in U.S. stores to spruce them up) in the process.
Once can only hope. In the meantime, Wal-Mart shares, if not cheap are certainly cheaper than they’ve been. In a long time, based on the PE ratio.
And at these prices, the dividend yield is inching toward 3%.
Along with the massive buybacks, Wal-Mart boosted the dividend 21% earlier this year, better than the prior year’s 11% hike. So those buying now could see a nice bump in their yield come early next year when the company’s board takes up the dividend rate again.
Nobody wants to see Wal-Mart go into a spiral of shrinking same-store sales, as Sears (SHLD) has in recent years.
But flat-ish U.S. sales, with widening margins, and some improvement in margins at the fast-growing international operations, wouldn’t be so bad, especially with the dividend growth expected.