Wal-Mart Stores, Inc. (WMT), Family Dollar Stores, Inc. (FDO): Will This Store Ever Stop Growing?

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Retail giant Wal-Mart Stores, Inc. (NYSE:WMT)’s  results for its fiscal 2014 first quarter were quite average. The company delivered a satisfactory performance in the recent quarter. Now, lets analyze the scope of it further improving its top and bottom line.

Wal-Mart Stores, Inc. (NYSE:WMT)

I strongly believe that when it comes to a mature firm like Wal-Mart Stores, Inc. (NYSE:WMT), there is not much reason to be concerned even if there is a weak quarter. Even though same-store sales have dropped in the U.S., the company’s international business increased 5.4% during the quarter on a constant currency basis. Despite the company’s controlled expansion strategy, it continues to gain market share in the the U.K., China, and Brazil because of sturdy e-commerce growth and increased comparable same-store sales. Further, Wal-Mart Stores, Inc. (NYSE:WMT)’s comparable same-store sales in Argentina, Chile, Central America, and Africa have grown.

The company’s online business definitely has great potential, as it seems to be completely untouched. Wal-Mart Stores, Inc. (NYSE:WMT) has set its goal to earn $9 billion of its 2013 revenue through internet sales, which accounts for about 2% of the company’s total sales. Nielsen predicts that the online retail business is expected to grow at an 11% CAGR, the fastest among all segments. It seems that the company is realizing the importance of online retail and focusing its energy on it which is evident from a y-o-y 30% growth in its e-commerce operations.

In the modern retail business, the margins have become razor thin; hence, controlling expenses seems to be a major problem for retailers. Wal-Mart Stores, Inc. (NYSE:WMT), during Q1 fiscal 2014, has continued to control its operating expenses, which is evident as its consolidated operating expenses, as a percentage, remained nearly flat despite a 44.4% rise in corporate and support expenses.

Moreover, it tightened spending on its distribution and transportation by focusing on improving its supply chain efficiency. Compared to last year, Wal-Mart Stores, Inc. (NYSE:WMT) transported 3.1% additional cases per mile at parallel costs. Its projects such as MyGuide and OneTouch have aided it in the efficient handling and movement of goods, which raised the cases handled per hour by 3% in the quarter.

A lesson from Family Dollar

Wal-Mart caters mainly to low-income shoppers; however, it has previously missed out on a large customer base which favors dollar stores over it. Wal-Mart’s Neighborhood Market format, which competes with Family Dollar Stores, Inc. (NYSE:FDO) and other Dollar stores has not yet been able to deliver.

Wal-Mart, beyond doubt, is huge but it is not replicating the model Family Dollar Stores, Inc. (NYSE:FDO) applies in its stores. On the contrary, its Neighborhood Market format stores are larger than the usual dollar store and have the same merchandise as its Wal-Mart Supercenters. The stores carry a large variety of the same products instead of a low variety in each product type. Family Dollar Stores, Inc. (NYSE:FDO) and other Dollar stores rely on high inventory turnover to earn profit, which is difficult with such huge assortment of products.

The smaller size of the Family Dollar Stores, Inc. (NYSE:FDO) stores acts as an advantage for its customers. The fact that they know exactly what is kept where in the stores saves them time. Moreover, Family Dollar Stores, Inc. (NYSE:FDO) have the facility to park cars in front of its stores, again saving customers time. Wal-Mart is also far behind Dollar Stores when it comes to stores count, and thus, it has to open a large number of stores in this format to compete with Dollar stores at large.

Family Dollar Stores, Inc. (NYSE:FDO)’s EBITDA per share has grown at a double-digit rate annually over the last decade as its stores have been  profitable even when the U.S. economy has been sluggish. It is a good long-term investment and currently trades at 17.5 times earnings.

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