Walmart Stores Inc. (NYSE: WMT) is one of the strangest companies in America. The numbers show the king of big box stores is one of the most profitable companies, but Walmart management is spooked by recent sales figures.
The retailer reported revenue of $475.11 billion at the end of last October, and a quarterly gross profit margin of 24.47%, according to Ycharts. Despite the huge profit, company executives seemed to panic during the retailer’s conference call last week. Store sales dropped 21% during the fourth quarter of 2013.
The decline was attributed to Congress $5 billion cut in the food stamp program. About one out of five American consumers are on food stamps. The decline is a major blow to Walmart’s traditional business model selling lots of low priced items to low income consumers.
Even as Walmart’s sales figures were falling, Costco Wholesale Inc. (NASDAQ: COST) reported that its same store sales increased six percent. Walmart’s old business model of marketing to the working poor doesn’t work in today’s retail environment.
Walmart used to pick up a lot of low income business because of low prices. However, an increasing number of discount retailers provide the same merchandise at discount prices, including Costco and dollar stores. That means a lot of people no longer have reason to go to a place they cannot stand.
However, the king of big box stores is making smart moves to recapture the low income market. It’s investing heavily in so-called small box discount stores, and smaller dollar stores. Walmart plans to double the number of small stores it plans to open in the next year from 150 to 300. The smaller stores are also more profitable.
Small box stores could become a huge profit center for Walmart because the company can offer a lot of services that companies like Family Dollar cannot. These include financial services like check cashing and money orders, pharmacies and a wider selection of food.
Walmart’s real future might be online, with online sales growing by 30% in 2013, CEO Doug McMillion said in a conference call. Walmart is aggressively expanding online operations. The company has set up Walmart To Go, a delivery service in which trucks bring merchandise ordered online directly to customers in some markets, including Denver. The service is designed to compete directly with Amazon’s Prime.
Walmart is also experimenting with a Walmart To Go option, in which customers select and pay for merchandise online, and then pick up merchandise at a local store. Walmart is not only still highly profitable, it also has a bright future. Investors should definitely take a second look at this retail giant because its share value has been falling.