Retail giant, Wal-Mart Stores, Inc. (WMT)’s South African acquisition of Massmart Holdings Ltd., has planned to expand by doubling its market share in food sales.
Accordingly, Massmart has planned to invest 20 billion rand ($2.77 billion) over five years to double its market share from 10% now. Consequently, Massmart’s capital expenditure would shoot up from 1.1 billion now to 1.6 billion rand by June 2012. The company is also prepared to take on more debt to fund expansion plans.
Walmart took a 51% stake in Massmart in June for $2.4 billion, and is currently making an aggressive price and margin strategy for Massmart to help it to expand and challenge South Africa’s dominant grocers such as Shoprite, Pick n Pay and Spar.
Looking at the progress of Massmart, South African retailers are also gearing up for expansion. Shoprite has planned to spend 3 billion rand ($415 million) to expand and upgrade its supply chains and open 74 new stores. However, it would not intentionally cut its 5.5% gross profit margin to defend its market share.
On the flip side, another merchant, Pattison, would open 27 new stores, mostly in South Africa by June-end 2012.
On August 25, Massmart posted a 25% decline in full-year earnings, hit by costs related to its deal with Walmart and price markdowns. Massmart achieved a gross profit margin of 18.3% in the year to end-June, slightly higher than 18% a year earlier. However, Massmart stated that it is ready to sacrifice its margins in the short term as it seeks a bigger slice of the domestic retail market.
Walmart reported its better-than-expected first-quarter 2012 results on August 16, with quarterly earnings of 98 cents a share up by 12.6% over the prior-year earnings of 87 cents a share as well as surpassing the Zacks Consensus Estimate of $1.08.
Based on the strong results of the first quarter and the economic environment in the United States and around the world, Walmart’s management provided an estimate that second quarter fiscal 2012 diluted earnings per share from continuing operations will be in the range of $1.05 and $1.10, compared with last year’s reported EPS of 97 cents.
We also remain encouraged by the company’s significant presence in the international market. The international segment of the company consists of retail operations in 14 countries and Puerto Rico.
Currently, Walmart, which faces stiff competition from Target Corp. (TGT) and Costco Wholesale Corporation (COST), has a Zacks #3 Rank, implying a short-term Hold recommendation.
