Why You Should Avoid Wal-Mart

Consumer spending is slowing in the U.S., and the effects can be easily seen in the lackluster earnings results many retailers have recently posted. People are not willing to open their wallet,s even though their overall income has increased.

As a result,Wal-Mart announced disheartening third-quarter results that didn't meet analysts' expectations. Also, its dull outlook made investors largely unhappy.

The numbers
Wal-Mart's revenue inched up slightly to $114.9 billion. However, analysts expected sales of $116.8 billion. Comparable-store sales in the U.S. decreased 0.3% as fewer customers flocked to Wal-Mart stores. This was mainly because customers restricted their spending as they are trying to save every penny that they can.

The company's Sam's Club segment performed better with a comparable-store sales increase of 1.1%, since Sam's Club provides products at much lower prices to its members. In fact, Costco Wholesale , which operates membership warehouses, posted a 5% increase in its same-store sales as budget-conscious customers made bulk purchases from its warehouses in order to save money.

Although Costco witnessed higher customer traffic, an increase in costs led to a lower than expected bottom line in its recently reported quarter. Wal-Mart has been facing stiff competition from Costco in the warehouse segment. Moreover, Costco plans to expand its presence in Mexico by adding new stores and launching a Mexican e-commerce website. Wal-Mart also has a strong presence in Mexico.

Another factor which played a key role in Wal-Mart's underperformance was the closure of 50 stores in Brazil and China, which reduced revenue from the retailer's international segment. However, the retailer plans to add 100 stores in China in the years to come.

Endless challenges
Wal-Mart has a number of challenges which need to be overcome. Apart from macroeconomic factors such as low consumer demand, the retailer has to fight stiff competition from other players.

One of the challenges for Wal-Mart has been show-rooming. The emergence of online retailers such as Amazon.com , which delivers products at lower prices with the click of a mouse, has affected Wal-Mart's sales. Customers simply try on clothes in Wal-Mart stores and then buy them online from Amazon. Although Wal-Mart has expanded its e-commerce business significantly, it cannot compete on price with Amazon since the latter has no store-related costs. Additionally, Amazon has been expanding AmazonFresh, which will compete with Wal-Mart's grocery delivery business.

Wal-Mart has been trying to provide the lowest possible prices in order to attract the maximum number of customers, and it plans further price cuts. However, this will affect its margins as well as its bottom line. This justifies the lowered outlook that Wal-Mart provided with its quarterly results. The retailer now expects adjusted earnings between $5.11-$5.21 per share for the fiscal year, versus the range of $5.10-$5.30 per share it provided earlier.

The takeaway
Wal-Mart has not been able to live up to investors' expectations. Its disheartening results were accompanied by a dull outlook, leading to a drop in its stock price. Moreover, it has been witnessing declining store traffic, lower comps, and increased competition in all of its segments. Thus, a prudent investor should stay away from this company.