Zacks_Analysts' Blog : Wal-Mart Stores Close in China - Analyst Blog

Retail giant Wal-Mart Stores Inc. (WMT) has agreed to stop operations at 13 stores in southwest China, following the allegations of mislabeling ordinary pork as organic.

The municipal government of Chongqing in southwestern China has accused Wal-Mart of selling substandard food and thus fined the company with $420,000 and ordered to close 13 Wal-Mart stores for 15 days. In addition, many of its store managers were detained in Chongqing.

According to many analysts, large retailers in China have been penalized before, for mislabeling food products, particularly for selling expired items. Since 2006, Wal-Mart has been fined 21 times in Chongqing for deceptive advertising or for selling expired food. Also in January, Wal-Mart and Carrefour were fined for charging extra on promotional items.

Although Chinese government has become stricter in maintaining their standards of quality control, labor rights and other industrial issues for foreign companies than for Chinese-owned companies, it is expected that the re-occurrence of such issues is due to the lack of central (organic) certification authorities in China.

Wal-Mart had approximately 346 stores in China in August with more than 3,000 associates in Chongqing. Further, Wal-Mart generates about $7.5 billion of annual sales in China, which is growing at a double-digit pace.

However, the resignation of Wal-Mart’s chief financial officer (CEO) and chief operating officer (COO) in China in May has posed difficulty for Wal-Mart. Nevertheless, Wal-Mart is trying hard to improve its operations in Chongqing and has also assured its customers to meet expectations in future.

Earlier, on August 16, Wal-Mart reported better-than-expected first-quarter 2012 results. The quarterly earnings of 98 cents a share rose 12.6% over the prior-year earnings of 87 cents as well as surpassed the Zacks Consensus Estimate of $1.08.

Further, Wal-Mart faces stiff competition from Target Corp. (TGT) and Costco Wholesale Corporation (COST), and has a Zacks #3 Rank, indicating a short-term Hold recommendation.