Probs Deeper than Leaked Emails – Price Invest Not Driving Improved Traffic at WMT

Today’s leaked emails are not entirely surprising when considering the ‘juiced’ sales in January 2013 (via calendar shift the first week of the fiscal month) and the payroll tax hike. But, the company’s problems run much deeper.

At the end of Q1 2012, Wal-Mart (WMT – $70.82) management suggested that it was “investing in price” at both the core chain and Sam’s Club to drive traffic. Yet, the core chain’s traffic decelerated in Q2 2012 and Q3 2012 relative to Q1 2012. Not good. Therefore, is the company’s “price investment” actually driving traffic?

Here’s the problem, following 4 consecutive quarters of improved traffic (Q4 2011 through Q3 2012), the core chain lapped an increased level of traffic in Q4 2012.

Coinciding with the anniversary of an increased level of traffic at the core chain, the company planned for a much larger marketing spend in Q4 2012 (radio/TV). Therefore, it will be interesting to see if the core chain’s traffic improved in Q4 2012 versus LY. If not, FY 2013 is setting up to be an ugly year for WMT.

Our forward EPS estimates imply a continuation of the company’s recent trend… lower GPM% in conjunction with SG&A leverage. But, in our view, the consensus sell-side EPS estimates for FY 2013 are too high as the consensus appears to imply a modest EBIT margin expansion versus LY.

Let’s keep an eye on inventory. When reporting results for Q3 2012, WMT management suggested that it was “not pleased” with the International Division’s inventory control.

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