Declining Sales Trend Puts Wal-Mart on Back Foot

Wal-Mart (WMT) is the world’s largest retailer, competing with companies like Target (TGT), Costco (COST), and Best Buy (BBY). Wal-Mart’s average revenue per square foot for its U.S. stores has been relatively stable since past two years in the range of $428-$434. We expect the revenue to increase slightly in the near term and stabilize thereafter.

With a wide assortment of product offerings to its target group of low-to-middle class U.S. consumers and by maintaining its pricing power over suppliers, we believe Wal-Mart will be able to sustain its leadership in the retail industry. But the company’s comparable store sales growth has been declining due to competition from discount stores and a change in consumer spending habits due to a weak economy – all of which are impacting sales.

While we expect revenue per square foot for Wal-Mart US stores will increase to $434 by the end of Trefis forecast period, Trefis members predict the revenue level will cross $485 implying 8% upside to WMT stock.

We currently have a Trefis price estimate of $65.42 for Wal-Mart’s stock, above the current market price of $52.09.

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Pricing Power Over Suppliers

Wal-Mart is the largest retailer in the world with almost 50% higher sales than its seven closest competitors combined. The retail giant uses its enormous size and buying power to put pressure on its suppliers to sell goods at low prices. In return, the suppliers have an incentive to sell large volume of goods. The company then passes these savings to its customers. Wal-Mart has significant influence on its supplier companies since they depend on Wal-Mart for a large part of their sales. For example, in the past Wal-Mart has successfully influenced companies like General Mills to reduce costs by implementing redesigns of its products and packaging.

Competition, Declining Sales Could Weigh on Wal-Mart

Wal-Mart has been putting efforts into remodeling its stores and undertaking multichannel initiatives to draw customer traffic to its stores. The intent is to manage inventory better, consume less store space and improve customer service – which should have a positive impact on sales. Despite these ongoing efforts, Wal-Mart’s Q4 2010 results saw comparable store sales, a metric to measure a company’s sales growth, decline 1.8% – a continuous decline since past seven quarters. Struggling to make a mark in apparel sales and growing competition from discount stores and dollar stores that offer products at comparable or cheaper prices are few factors weighing on Wal-Mart’s revenues. [1]

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Trefis Community Forecast

Trefis members forecast Wal-Mart’s revenue per square foot for U.S. stores will increase from $440 in 2010 to $487 by the end of the Trefis forecast period, compared to the baseline Trefis estimate of an increase from $428 to $434 during the same period. The member estimates imply an upside of 8% to the Trefis price estimate for Wal-Mart’s stock.

Our complete analysis for Wal-Mart’s stock is here.

Notes:

U.S. Sales At Wal-Mart Show Decline, NYtimes.com, Feb 22, 2011