Wal-Mart: Thriving During Retail Recession

Price is king in this slowed economy, and people have been buying products from discount stores as they focus more on the necessities rather than splurging on discretionary items. Wal-Mart (WMT) has been thriving in this type of environment and is worth a look as a potential investment.

Wal-Mart currently has 5.28% sales growth expectations priced-in by assuming 6.45% EBITDA margins. In the past 9 years, the company has been able to grow its sales at a rate greater than 5.28% in eight of those years. Year to date, the company has grown sales by 8.47% while maintaining its margins.

Wal-Mart’s Advantages:

Low expectations for sales growth - the current trading price implies annual sales growth expectations less than what the company has delivered in any year since 1999.

Sound operating strategy - Management has recently slowed new store openings in the US to focus more on enhancing profitability and quality of customer services.

A Reliable Wealth Creator - Wal-Mart has maintained a positive Economic Margin (what a company earns above its cost of capital) meaning it has remained profitable since 1994 (the earliest history we track). In addition to generating positive economic margins, Wal-Mart has grown its asset base by expanding the number of locations around the world, and expanding through different store formats including Wal-Mart, Super Wal-Mart and Sam’s Club.

Sound Operating Philosophy - Wal-Mart is a one stop shop for average American families where they can get gas, a tune-up, new tires, groceries, apparel, electronics, pharmacy services, and basically everything they need for their daily lives. Wal-Mart enjoys a competitive advantage by offering those comprehensive products and services through everyday low prices.

Great companies don’t always make great investments, but Wal-Mart is in a sweet position to be both.

Below is a chart highlighting Wal-Mart’s historical Economic Margin Levels vs. the median Economic Margin Company of the entire universe. Being that the average firm in corporate America earns an Economic Margin of 0 this is a huge accomplishment for Wal-Mart to be able to sustain such high Economic Margin levels for the past decade.

Wal-Mart’s Historical Economic Margin Levels
vs.
The Historical Median Economic Margin Levels for the Entire Universe

Comments

[Market Folly:]

yup, plays into the whole "trading down to cheaper alternatives" thesis. long WMT and MCD and other cheap retailers as a hedge against an overall short retail play (especially discretionary). wrote about it more here: www.marketfolly.com/20...

2008 Dec 22 09:49 AM

[Robert Stin...:]

And those "low prices" come from outsourcing every job they can to China. So while you are shopping there you are actually working to put yourself out of a job. I'll spend a few cents more at a decent store that pays its employees well, treats them with respect and doesn't buy 90% of its stuff from China.

2008 Dec 29 09:12 PM