Published March 01, 2013
Wal-Mart says it saved families $2.3 billion with cheaper produce. The retail giant made the announcement as part of its push to help fight obesity at the urging of the First Lady.
But is Wal-Mart's good guy approach good for its bottom line?
Wal-Mart (WMT) is a bellwether -- it is the country’s largest retailer and accounts for $1 out of every $10 in non-automotive U.S. retail sales. Yet its store traffic and earnings growth have slowed in recent quarters, same-store sales rose just 1% versus a year ago, and its economic outlook is dim.
Groceries now account for 55% of its sales, up from 24% in 2002. Those profit margins are notoriously slim. Nevertheless, First Lady Michelle Obama visited a Wal-Mart store in Springfield, Mo., yesterday to celebrate the retailer's progress in selling food with 9% less salt, 10% less sugar and 50% less transfats.
The First Lady also lauded the retailer for opening 86 new stores in areas without affordable groceries. Meanwhile, dollar stores and Target (TGT) continue to undercut Wal-Mart, unions continue to attack it, and shoppers face higher payroll taxes, gas and food inflation, delayed tax refunds, and consumer confidence is at its lowest since 2011. Not even everyday low prices can withstand those pressures.
Is this the growth strategy investors want?
Wal-Mart's fiscal fourth-quarter earnings beat on Feb. 21 was largely due to tax credits lowering its tax bills, a tax rate of 27.7% versus 30.9% a year ago. Earnings grew 8.6% to $5.6 billion versus the fourth quarter 2011. It missed on top-line estimates, though, as revenue grew just 4% for the quarter. For the entire year, net sales reached $466.1 billion, an increase of more than $22 billion, or growth of 5%. (Wal-Mart's fiscal year begins February 1.)
Wal-Mart has been ramping up its grocery business for years, for more than a decade. It’s the nation’s biggest grocer, its sales are bigger than the next biggest three combined, and it’s been torpedoing other supermarket chains. SuperValu and Safeway have seen pressure on same store-sales, rising in the low single digits. Kroger is hanging strong. The thinking is, their weakness is good for Wal-Mart.
“The average number of shopping trips a customer makes to Wal-Mart has gone from 12 per year to 52 or more," says Burt Flickinger III, managing director of Strategic Resource. "Since customers spend on average between $50 and $60 in total per trip, that's an extra $2,000 per customer each year that Wal-Mart is bringing in."
But at the same time, the cheap dollar stores are undercutting Wal-Mart. Kohl’s and Target have better, more fashionable merchandise women like. Wal-Mart’s estimated quarterly profit margin was sticking at around 3.2-3.5%, below Target’s 4.2%, but has since risen to around 4.4%, according to market analysts YCharts.
Yes, groceries are non-discretionary spending, consumer spending here remained stable during the recession, and yes Wal-Mart can cross-sell pharmaceuticals, soaps, shampoos and clothes to grocery shoppers. Yet Wal-Mart’s soap and shampoos offerings are not that great, and its meat and seafood offerings are not up to par. People buy the basics at Wal-Mart when it comes to food, and that’s about it.
Besides, even supposedly healthy offerings like yogurt or orange juice or organic teas have about as much sugar in them as Captain Crunch cereal or a can of soda. Even skim milk has 12 to 14 grams of carbohydrates.