Wal-Mart Stores Inc. would like the Street to focus on the growth of its new urban stores in the U.S. when it provides first-quarter results on Thursday. But many investors will be distracted from the fundamentals by the continuing storm of criticism following bribery allegations that threaten to shake up the company’s leadership.
The world’s largest retailer is forecast to deliver profit growth of 4 per cent on revenue expansion of 6 per cent compared to the year-earlier period.
Same store sales growth in the U.S. has been lethargic in the last two years, partly because Amazon.com Inc. and other online stores are eating into Wal-Mart’s market share for general merchandise. But Wal-Mart is managing to expand through new markets, overseas and at home.
In the U.S., it is pushing into city centres with smaller stores designed to appeal to the urban shoppers. By some estimates, the neighbourhood market could eventually be worth as much as $80-billion (U.S.) a year to the retail giant. Wal-Mart first launched the concept in 2000, with limited success. But the company has finetuned its strategy and the profitability of small stores is improving, reportedly generating net margins of about 3 per cent, compared with 5.5 per cent generated by Wal-Mart’s supercentres.
International growth has outpaced all other areas, with sales up more than 13 per cent in the fourth quarter. But the company’s relentless push into all corners of the world may face new hurdles after allegations that Wal-Mart de Mexico used a campaign of bribery to achieve market dominance.
The New York Times last month reported a paper trail of more than $24-million in bribes paid by Wal-Mart’s largest subsidiary and said leaders at the headquarters in Bentonville, Ark., decided to cover the affair up after allegedly being informed that both Mexican and U.S. laws were likely broken.
Fallout to date has included a lawsuit filed by one of the largest pension funds in the U.S., the California State Teachers’ Retirement System, that alleges fiduciary violations, as well as calls for a review of leadership.
Wal-Mart says it is investigating the matter but still doesn’t have “a full explanation of what happened.” In a statement, Wal-Mart spokesman David Tovar said: “Many of the alleged activities in The New York Times article are more than six years old. If these allegations are true, it is not a reflection of who we are or what we stand for. We are deeply concerned by these allegations and are working aggressively to determine what happened.”
The lack of clarity has left many investors uncomfortable. The shares remain 5 per cent below their price before the New York Times article appeared on April 21, but in the immediate aftermath tumbled as much as 8 per cent. The longer-term effects are harder to gauge but could be significant.
“Management infrastructure and oversight in some international markets remain an ongoing challenge,” Wayne Hood, an analyst with BMO Nesbitt Burns Inc., wrote in a recent report. “Articles like this will be used against the company by activists and competitors when it attempts to open stores in the U.S. and abroad and could make it more difficult to attract management talent in international markets.”
Wal-Mart shares have underperformed this year, down a fraction of 1 per cent compared with S&P 500 index’s 8 per cent gain. They are priced at about 12 times estimated earnings for the year, in line with the S&P 500, but below some competitors, including Costco Wholesale Corp.
Mr. Hood says the current discount to the stock’s historical range is merited, given Wal-Mart’s sluggish same store sales growth, the pressure of U.S. margins and higher-than-expected inventory levels.