Big box retailers have a huge underutilized asset at each of their stores, their roof. As these companies look to lower operating costs, companies like Wal-Mart Stores, Inc. (NYSE:WMT) installing solar panels on their roofs makes good financial sense. These panels will not only provide electricity with very little maintenance, they will also shade the building during the hottest part of the day, lowering air conditioning costs.
The average electric bill for a Wal-Mart Stores, Inc. (NYSE:WMT) super store is around $28,000 per month. Wal-Mart currently has 4% of its 4,500 U.S. stores equipped with solar panels on its roofs, generating more solar power than the state of Florida. As the price per watt of solar panels comes down, we will see Wal-Mart and other companies have lower electricity costs, leading to better earnings and potentially increase sales for solar panel installers.
The economics behind solar energy is really starting to make sense when compared to traditional sources from the Grid. All of this previously useless space is starting to generate savings for Wal-Mart Stores, Inc. (NYSE:WMT) and other retailers. SolarCity Corp (NASDAQ:SCTY) just signed a deal with Wal-Mart Stores, Inc. (NYSE:WMT) to outfit 60 of its stores in California with solar panels. Although the terms of this agreement haven’t been disclosed, we will see other retailers following Wal-Mart’s lead to reduce costs and increase earnings on a one for one basis.
Others jumping in
Wal-Mart’s arch rival, Costco Wholesale Corporation (NASDAQ:COST) is a leader in renewables. The Issaquat, Washington-based company already has 10% of its worldwide rooftops generating clean solar power that reduces the electric bill for this retailer. Costco earns nearly half of its profit from the yearly fee it charges to shop at its warehouses. Costco has operating margins of 2.3%, and focuses on volume, and pays its employees nearly double the industry standard. Costco’s leadership is dedicated to serving all parties it serves: customers, shareholders, employees, and suppliers.
The roll out of these installations will be heavily dependent on the cost of comparable electricity, state and local tax breaks, as well as how intense the sun is shining on a particular store.
Costco’s leadership in this industry has rewarded shareholders with a 120% increase in share price in the past four years. Just like Wal-Mart, as Costco reduces its dependence on the grid, it will also reduce its electric bills. This savings will flow right down to the bottom line.
Experiment in Texas
In 2004, Wal-Mart Stores, Inc. (NYSE:WMT) acquired its own electric company in Texas that will purchase electricity at wholesale prices and supply its own stores. This division will save the retail behemoth over $15 million per year, all of which flows right to the bottom line.
Texas electricity suppliers could be facing some stiff competition if Wal-Mart focuses on expanding its footprint into the energy markets. Companies like American Electric Power Company, Inc. (NYSE:AEP), that have a large presence in the state could see even more pressure on margins. Currently, Texas’ deregulated electricity market allows utilities to compete against each other, which increases pressure on margins.
American Electric Power has nearly 40% of its service territory in Texas, and a competitor the size of Wal-Mart could really decrease American Electric’s operating margin. Currently, American Electric has operating margins of 17.5%, slightly lower than the industry average of 18.5%. American Electric also pays out 74.1% of earnings to support a 4% dividend. Utilities in the south could see increasing competition from micro projects that generate electricity from rooftops where sun is plentiful and the cost per watt of electricity keeps dropping.
Wal-Mart’s core competency isn’t in the electricity business, but it has been known to expand its reach into areas like auto-repair. If Wal-Mart Stores, Inc. (NYSE:WMT) does venture into the retail electricity market, it would have to do it in a big way to move the revenue needle.
Foolish bottom line
Wal-Mart is a giant retailer with a state of the art supply chain and a huge distribution network. Wal-Mart’s expansion into renewable and the electric wholesale market will help it reduce costs in its stores and ultimately help consumers save money. Wal-Mart could even one day sell excess solar power that it generates to electric companies and create yet another revenue stream.
The article This Company Is Capitalizing on Sunny Days originally appeared on Fool.com and is written by Wes Patoka.
Wes is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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