WMT and Retail


This morning, WMT reported Q4 ’13 results that were in line with expectations that already reflected previously reduced guidance (late January).

  • FY ’14 guidance ($5.10 to $5.45) was disappointing relative to consensus ($5.55 coming into today), including guidance for operating margin contraction that reflected deleverage on weaker sales as well as higher healthcare and e-commerce expenses.
  • Additionally, to the extent that weaker guidance represents a continued commitment on the part of WMT to maintain some of the promotional cadence that we saw during the holidays, it represents a negative across the retail landscape.  Recall that WMT’s aggressive discounting during the holidays negatively impacted a number of retailers (BBY and SHLD, among them) and even weighed on AMZN’s results.
  • Further, the company increased its CAPEX guidance by $600 million which we see as neither constructive for the stock or for retail broadly.

With respect to CAPEX and WMT, we believe that WMT trades on some of the same metrics that we use to examine and analyze consumer staples, specifically ROIC and FCF.  Increased capital spending doesn’t augur well for either of those metrics and further supports our view of WMT as a source of funds.

To the extent that increased capital spending is being used to fund the increase in guidance with respect to new U.S. “small stores” openings (270-300 in ’14 versus prior guidance of 120-150), we see this as a modest incremental negative across retail, both staples and discretionary, as WMT is likely positioning itself to roll these stores out in aggressive fashion over the next several years.

Recall, we were constructive on WMT back in July (versus TGT, which remains on our least preferred list), but switched our view when we examined several macro factors that we felt would weigh on lower end consumers.

WMT called out the reduction in SNAP benefits (one of our concerns) as a drag on comps and a headwind that will be ongoing in ’14.

  • The company cited negative comps in the first two weeks of February, continuing the weather (so the company says) related weakness experienced in January.
  • While we have no doubt that weather has contributed to comp weakness, we see other factors (see our note from earlier in the week) that have likely weighed on sales and that won’t go away with the coming of spring.

Also on our list of concerns is deflation – deflation in certain categories could weigh on comps and operating margins in 2014 – this would also negatively impact grocers and distributors (SYY is on our least preferred list) as well as WMT and TGT.

Bottom line, we see very few reasons to get excited about the prospects for either WMT or its customers (sadly) in 2014.

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