Another Headwind for Walmart – Overseas Weakness (WMT)

by Dan Burrows | July 21, 2014 1:12 pm

Another Headwind for Walmart – Overseas Weakness (WMT)

Walmart (WMT[1]) stock is off more than 2% this year against a broadly higher market, and as much as floundering U.S. sales are taking the blame, the retailer’s sprawling international operations aren’t doing WMT stock any favors, either.

Walmart185 Another Headwind for Walmart   Overseas Weakness (WMT)As we’ve written before, in many ways the recession never really ended for companies like McDonald’s (MCD[2]) or Walmart. That’s a hangover that can be seen in WMT stock performance. The recession officially ended a bit more than five year ago, but WMT stock is up just 48% since then — not bad until you consider that the S&P 500 rose 93% over the same period.

Prices for all manner of assets have bounced back since the end of the recession — heck, stocks are at all-time highs — but wages and job security haven’t. True, the unemployment rate has dropped sharply, but more than 9.5 million people are still out of work.

Too many lower-income consumers — the bedrock of Walmart’s U.S. business — are living too close to the bone to spend as much as they once did. The uneven recovery left a big chunk of Americans behind, and that has been no good for consumer spending or WMT stock. Indeed, it caused Walmart earnings to go splat[3] in the company’s most recent quarterly report.

Almost lost amid the handwringing over domestic results is a serious downturn in international operations at Walmart, led by higher costs in key countries such as China and Brazil, as well as unfavorable foreign exchange rates.

There’s no doubt the market has noticed, adding further pressure on WMT stock.

Although the Walmart International segment accounts for just 29% of total revenue vs. 59% from U.S. operations, it has historically grown at a much faster pace. With more than 6,100 stores in 26 countries, international has been a big help — not a hindrance — to earnings.

At least not until fairly recently.

WMT Stock Trades on International, Too

For the last full fiscal year, international sales slowed sharply and operating profit tumbled. Indeed, revenue from Walmart International grew just 1.3% in fiscal 2014 after posting growth of 7.4% the previous year and 15% in fiscal 2012.

Partly as a result, operating income at Walmart International dropped more than 18% to $5.45 billion — or 20% of WMT total operating profits. (In the prior year, operating income grew 8.2% to account for nearly a quarter of all operating profits.) Charges for the closure of 29 stores in China and 25 units in Brazil due to poor performance were just one set of costs that hurt results.

The bottom line is that last year’s decline in the international segment was steep enough to drag down Walmart’s total operating income by 3.1%. Slumping profitability is a huge headwind for WMT stock and no small part of why it has gone nowhere over the past 52 weeks.

WMT stock desperately needs a pick-up in U.S. results, particularly when it comes to comparable store sales — but it also needs the international business to return to outsized growth.

On the optimistic side for revenue growth overseas, Walmart made no significant acquisitions to drive sales growth in the international business last year, and many of the costs were either one-time charges or stemmed from business-building investments in China, Brazil and the U.K.

That said, WMT can’t do anything about forex fluctuations ripping out a chunk of the top line. Indeed, sales fell 1.4% in the most recent quarter because of currency exchange. Wage and price pressures aren’t going away, either.

Bottom Line

The future trajectory of WMT stock lies more with healing its sickly U.S. business, but international operations are critical too. Perhaps WMT’s overseas slowdown will prove to be temporary; operating income grew 3.4% in the most recent period, vs. a drop of 4.3% for the U.S.

But if WMT stock is to gain any traction this year, it needs international to go back to pulling the weight it once did.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

Endnotes:
  1. WMT: /stock-quotes/WMT-stock-quote/
  2. MCD: /stock-quotes/MCD-stock-quote/
  3. Walmart earnings to go splat: http://investorplace.com/2014/05/wmt-earnings-csco/

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