Analysts say dollar stores are hurting Wal-Mart
Chains such as Family Dollar have gotten smarter about how to appeal to American consumers, experts say.
In the face of yet another quarter of sluggish profit and sales, superstore Wal-Mart (WMT) announced Thursday morning that its full-year profit will be lower than what it had previously forecast.
And while the company is pointing to costs like investments in e-commerce and higher health care expenses in the U.S. as reason for the lowered guidance, some Wall Street analysts are pointing to the strength in dollar store chains like Family Dollar (FDO), Dollar Tree (DLTR) and Dollar General (DG) as reason for some of Wal-Mart's sales struggles.
Wal-Mart reported Thursday morning that it recorded $120.1 billion in second quarter fiscal 2015 revenue, a 2.8 percent increase over the year-ago quarter that exceeds the analyst consensus by $1 billion. Net income for the quarter ticked up 0.6 percent to $4.1 billion, resulting in earnings of $1.21 per share, a figure that meets the analyst consensus.
Comparable store sales for the quarter (excluding fuel) were flat, a result that Brian Yarbrough, a consumer staples analyst for Edward Jones, called "not something to get excited about."
In a phone interview, Yarbrough noted that grocery items account for 55 percent of Wal-Mart's business, but as grocery chains like Safeway (SWY) and dollar stores like Family Dollar have gotten smarter with how to appeal to the American consumer, Wal-Mart has suffered.
"I think the lower income consumer continues to be under pressure and they're visiting the dollar stores for fill-in trips. I think that's why Wal-Mart's struggling," he said, noting that if a family wants to pick up just a carton of milk and a loaf of bread to round out the week, "it's a huge hassle" to go to Wal-Mart, whereas the smaller scale of the Family Dollars and Dollar Trees of the world make it much easier for consumers to go there.
Wal-Mart president and CEO Doug McMillon said in a statement Thursday morning that he was pleased with the company's "solid" earnings-per-share results, but added, "as it relates to our challenges in the quarter, we wanted to see stronger comps in Wal-Mart U.S. and Sam's Club, but both reported flat comp sales. Stronger sales in the U.S. businesses would've also helped our profit performance."
McMillon also said that he was encouraged by Wal-Mart's performance in its international segment, Neighborhood Market and e-commerce. Wal-Mart International posted an 8 percent jump in operating income, which grew to $1.5 billion, while global e-commerce sales grew 24 percent, with particular growth in the U.S., U.K., China and Brazil.
Wal-Mart's Neighborhood Markets -- the company's attempt to compete with smaller-scale grocery stores -- posted a 5.6 percent increase in comparable store sales and a 4.1 percent increase in traffic. The company opened 22 Neighborhood Market stores during the quarter and said that it remains on track to open 180 to 200 new units for the year.
While this should help Wal-Mart compete against companies like Safeway and even Family Dollar, Yarbrough cautions investors against an immediate turn around.
"Longer term there's value, [and] the small-store format is the right format," he says. "If you're a near-term investor, I don't know what turns the business. I don't know what turns the consumer. I think the consumer continues to struggle, too."
Indeed, pointing to costs from investments in the e-commerce business as well as higher health care expenses in the U.S., Wal-Mart cut its full-year 2015 profit outlook from $5.10 to $5.45 per share to a new range of $4.90 and $5.15 per share. The company said that this implies a third-quarter earnings-per-share range of $1.10 to $1.20.
Following the release of the earnings results, shares of Wal-Mart were flat Thursday at $74.11. Year to date, the stock is down more than 6 percent.
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What a fantastic article about Walmart hurting. The way they treat their employees is another main reason why many people avoid this dump!
I have noticed all the items in Walmart have been sneaking up for the past few years. They are now as expensive as the highest price grocery store in our town. I have not been there in a year or more. I don't intend to shop there any time soon.
long lines at check out as the stores are too cheap to hire help as the executives are making $250,000,000 a year and if they hire enough check out clerks then the executives would only make $50,000,000 a year and that is against company policy.
Also the restocking people will run you over as the main aisles are full of garbage displays trying to sell over priced products that don't work.
I do not shop at Walmart anymore it's goods are too expensive and nothing is made well in the store.
What happened China -- you use to produce great goods at a cheap price.
OK, OK, let me give it my best V_L impersonation:
The Fed artificially pumps billions and billions into this faux-capitalism society we call America, and the Walton heirs grow richer by the day. Walmartstreet tricks consumers and investors alike. Crooked capitalism prevails, and the deck is stacked against the little man. We demand our economy back. It is time for the drones to become the oppressors, and turn back the aristocracy. The future is bleak and dark and bloody.
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