Why Controversy Benefits Wal-Mart

Wal-Mart (WMT) is the company that Americans have such a remarkable love-hate relationship with. Here's a company that the small, local merchants can't compete with and which leaves a gigantic "asphalt and concrete footprint" wherever it goes. Yet Americans love bargains and they love to stretch their dollars, so WMT is usually on their "to-go" list.

Forbes.com recently published an article entitled "Does Walmart Really Erode Our Values?" by Art Carden. I love how the article starts off and how poetically it introduces this sensitive subject:

Do we sacrifice our values at the altar of commerce?

The poet William Wordsworth once said, "In getting and spending, we lay waste our powers." In this time of economic crisis, some people are re-evaluating capitalism as an economic system, suggesting that we need to recognize the tradeoff between materialism and higher values. I'm very sympathetic to the idea that non-material values are important, but does capitalism really crowd out these values? Does it truly erode our ethics?

To answer these questions, perhaps we should examine the social impact of one of the iconic--and controversial--symbols of American capitalism: Walmart.

But we investors like Wal-Mart's operating margins, its $23 billion of operating cash flow and its over $10 billion of levered free cash flow from which it can pay its 2% dividend and keep opening new stores all over the planet.

The tough consumer environment clearly is having an effect on retailers, who have largely struggled through this deep recession. At the expense of profits, most have cut prices to keep up sales volumes; job cuts and inventory reductions have helped support profit margins, but there is no getting around the dismal environment. On the other hand, some retailers have held their own, and surely Wal-Mart is one of the shining stars.

The company reported net income of $3.44 billion during the second quarter, or 88 cents a share. The profits outpaced expectations of 86 cents a share, which would have been the same profit the company reported in the year-earlier period. Sales were down 1.4 percent to $100.9 billion due to the stronger dollar hurting the value of overseas revenues. The currency fluctuations also hurt profits by about 4 cents a share, while inventory reductions of almost 6 percent helped during the quarter.

Sales were also weakened by food deflation. Grocery sales, a non-discretionary offering, have become more important to the overall company, as the higher-end items, like flat panel TVs, haven’t been exactly flying off the shelves.

Food and consumer staples have made up for the loss of high-end revenues, as Wal-Mart boasts better than 25 percent market share in the U.S. supermarket industry. Regardless of near-term pricing weakness, we expect grocery items to eventually track higher with inflation, helping non-discretionary sales. Discretionary sales will pick up as the employment and consumer spending environment strengthens, especially because Wal-Mart remains a price leader in the category.

Looking forward, the company raised the low-end of its full-year earnings guidance, which now is expected to be $3.50 to $3.60 per share. Shares are trading at 14.55 times the midpoint of this range, providing compelling value given earnings growth estimates of 12 percent. Shares also yield 2.1 percent, providing a nice bonus to their capital appreciation potential.

Wal-Mart sports a 5-year dividend growth average rate of 20%, with 31 years of uninterrupted dividend growth and a free cash-flow yield of around 4%. It's not one of the biggest stock buy-back of the mighty DJIA 30 companies, but it seems to do so regularly.

So, I think I'll put in an order to buy some shares at around $50.75 the next time it takes a dip. After all, I'm earning next to nothing in the money market account, and there seems to be little evidence that Americans and other earthlings will be doing less buying there and more buying at say, Target (TGT) or at Sears (SHLD).

No sir, I'll place my bet with WMT over those two laggards any day of the week, as long as I don't have to pay too much per share. The more controversy WMT is embroiled in, the more they are in the minds and consciousness of people everywhere, and the more shoppers will stop there, and in their ambivalence, shop, and shop and shop.

Disclosure: I don't own any of the stocks mentioned, but I have a buy order in on WMT.

Comments

[madmilker:]

People in America need to realize jus what got America in this shape…”cheap” yes so-call cheap items from a foreign land.

quote*Wal-Mart firmly believes in local procurement. We recognize that by purchasing quality products, we can generate more job opportunities, support local manufacturing and boost economic development. Over 95% of the merchandise in our stores in China is sourced locally. We have established partnerships with nearly 20,000 suppliers in China. *end quote!

Now! if there be 182 country’s making items for the world to buy and they have only 5% of the pie in China…duh! This company makes the nice people of China support their currency(yuan) by keeping it in their country working for the people there…. but with the “yuan” going up in value and the US dollar going down…all the foreign items that the American consumer buys thinking it is cheap has went up in price.

People…its all about the currency and to keep a currency strong you got to keep it floating around the country you live in so it can work for you. For the past 12 years all them US dollars are being shipped overseas to a foreign bank and with the American worker not making anything for the foreigner to buy the “we the people” have to turn to the “second” largest employer in America(Uncle Sam) to sell “we the people” debt in order to get all them dollars back!

50 years ago a foreigner would had given their left nut for a US dollar or a Hershey’s chocolate bar and today the same foreigner has got Uncle Sam and the American consumer by both all the while Hershey is moving the chocolate factory to Mexico. Wake up! America and think “MADE IN AMERICA.”

quote*"Considering that there are over 30,000 ships at sea this morning," writes James Carlton, director of the Williams College-Mystic Seaport Maritime Studies Program, in an e-mail, "the total number of organisms and species in this global 'bioflow' on the morning your readers read your piece could be staggering - billions of individuals, and thousands of species."

Indeed, scientists have long considered ballast water the primary way invasive aquatic organisms are introduced. From the zebra mussel's arrival in the Great Lakes, to an American jellyfish severely disrupting Black Sea fisheries, the potential costs of accidental introduction of a species to new homes can be tremendous. Aquatic invasives cost the US $9 billion yearly, according to estimates by David Pimentel, professor emeritus of ecology and evolutionary biology at Cornell University in Ithaca, N.Y. Zebra and quagga mussels (a cousin to the zebra) alone cost the $1 billion annually.*end quote!

tat is $9 billion a year in hidden taxes to all Americans...
cheap ain't chic and it cost America............jobs!

Sep 08 07:34 AM

[San Antonio...:]

I agree with the previous comment, but people still shop there. All the social consciousness aside, people don't want to be hit in the wallet. They rather buy the cheap now, and if more is taken where they can't see it, oh well. They prefer to pay $1.99 for a gallon of milk instead of $2.69. Try telling a single mom to shop at the local store and pay more now, or save a bit and be able to get gas in the car.

Sep 08 08:18 PM

[meridian575:]

Yahoo Finance has an article predicting a rise in E-commerce solutions with regards to the economic downturn and how it affects how people are spending money. Essentialy, analysts do not see a a slowdown as much in media and online expenditures
finance.yahoo.com/news...

Sep 11 11:40 AM

[meridian575:]

If Walmart wants to stay competitive it should increase its online and ecommerce presence, as that is where analysts see the largest growth in the short term. Yahoo Finance has a great article on the subject:
finance.yahoo.com/news...

Sep 11 11:43 AM