Wal-Mart Undertakes Restructuring in China; Fires Managers - Analyst Blog

Wal-Mart Stores Inc.(WMT) has been struggling of late and reporting disappointing earnings. Its U.S. comparable store sales have been sluggish as a result of weak spending by lower- and middle-income segment consumers. Amid a weak economic scenario and currency headwinds, Wal-Mart expects to generate revenues from international markets, especially in China and India, which represents close to one third of the world's population. However, the company has been grappling with slower sales and tough price competition in Asia.

Given the current scenario, Wal-Mart recently dismissed around 30 executives, including directors and senior staff in China, per reports. The headcount reduction is a part of an effort to cut costs and restructure business in the country amid declining sales.

Arkansas-based Wal-Mart has long been dealing with food safety scandals in China, including the Jan 2014 scandal where traces of fox meat were found in donkey meat. (Read: Walmart Recalls Meat Items from China). After the scandal, Wal-Mart even moved its China manager to U.S. (Read: Walmart Moves its China Manager). Not only this, reportedly, the company had encountered similar issues in China earlier, one of which involved mislabeling pork in 2011.

However, the company is continuously making efforts to maintain high food safety standards in China. Recently, Wal-Mart reportedly cut down on its Chinese pork suppliers in a bid to increase the efficiency of its distribution system and tighten quality control.

China is a strategic market for Wal-Mart, as the company's domestic markets have reached a saturation point. Wal-Mart currently has 404 stores in China and has plans to add as many as 110 stores by 2016 as the company expects China's food and grocery market to be worth $1.5 trillion by 2016. Wal-Mart has also decided to increase its investment in food safety measures in the country to 300 million yuan ($48.32 million) over three years through 2015, up from 100 million yuan in the same period, announced last year.

However, Wal-Mart China has been facing significant pressure from government austerity measures and deflation. Therefore, sales declined 0.8% in China during the third quarter of fiscal 2015.

The company however posted in-line earnings and better-than-expected revenues overall in the third quarter of fiscal 2015, after six weak quarters in a row. But the company narrowed its guidance for fiscal 2015 given the current pressure being observed by the company.

Wal-Mart holds a Zacks Rank #3 (Hold).

Some better ranked stocks in the retail sector include Safeway, Inc (SWY), Citi Trends, Inc, (CTRN) and Foot Locker, Inc. (FL). While Safeway sports a Zacks Rank #1 (Strong Buy), Citi Trends and Foot Locker hold a Zacks Rank #2 (Buy). 

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