What the Changing of the Guard at Wal-Mart Means for the Stock

Wal-MartWal-Mart Stores, Inc. (NYSE/WMT) is signaling its intent on conquering the global low-cost (discount) retail market following the announcement that Doug McMillon will become the new CEO and president of the world’s biggest and most influential retailer, boasting nearly $500 billion dollars in annual sales and employing over two million people worldwide.

The change at this time makes sense as Wal-Mart tries to expand its operations globally, especially in China. McMillon was a fitting candidate, as he had been CEO of Wal-Mart International and understands what it takes to grow a company internationally.

Wal-Mart operates around 11,096 stores in 27 countries worldwide. Sales in the United States account for the vast majority of its total sales stream, but international sales, at $33.1 billion in the fiscal third quarter, accounted for nearly 25% of total sales. This means that there are opportunities here.

While Wal-Mart is the “Best of Breed” and a buying opportunity in the discount retail sector, the company’s real underlying potential growth lies in its ability to expand its international sales, which is where McMillon comes in.


Wal-Mart Stores Chart

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In the fiscal third quarter, operating income rose 5.8% in the U.S., but saw eight-percent growth in its international stores on a constant currency basis. The profitability of its international stores indicates why the expansion in places such as China, Brazil, India, and other emerging markets is so critical.

Wal-Mart initially ventured into China in 1996 and is currently operating Supercenters, Sam’s Clubs, and Neighborhood Markets. The retail footprint comprises about 401 units in China, with 356 under the Wal-Mart Supercenter operation. Stores are situated in over 150 cities.

In China, with the focus on driving up domestic consumer spending, Wal-Mart has a great opportunity to reap the benefits. And with the proposed change to the one-child policy, we could see an even bigger consumer market open in China and that means sales.

In the works are many more stores in China expected to be opened over the next few years as Wal-Mart gets set to welcome the growing income levels in China and the new propensity to spend. (Read “China’s Expected Baby Boom a Boon for U.S. Business.”)

Take a look at the potential in China and other emerging markets. In the United States, the company operates about 4,786 retail units as of October 31, 2013. (Source: Wal-Mart Stores, Inc. web site, last accessed November 25, 2013.) Think of the potential in China with its 1.3 billion people and a middle class that is larger than the entire population of the U.S. While consumer spending is not at the same level as the U.S., the growth is there, and we will see it over the next decade. I wouldn’t be surprised to eventually see over 1,000 Wal-Mart stores in China.

And if the company can ever successfully grow its operations in India, another emerging market with about one billion people, the stock could return some massive numbers going forward under McMillon.