By Brian Sozzi
Good music, positive vibes from the crowd, and dancing -- sure sounds like a run of the mill rock concert, right? Well, not exactly. While there were hip tunes and a growing international constituent at Wal-Mart's (WMT) annual shareholder extravaganza, the event contained its fair share of corporate suits that one would be hard pressed to find at a Whitesnake concert.
The usual pomp and circumstance of the meeting did not get me down, ditto the feel-good personal accounts by those who work at an increasingly global Wal-Mart. Remember, whereas Wal-Mart is viewed as a behemoth that crushes small businesses and pays subpar wages in the U.S., abroad it's seen as a beacon to achieving a better standard of living. Whether it's an hourly employee who has visions of someday running a Wal-Mart store or a local farmer who has contracted with the retailer to supply it with fresh food, an opportunity is indeed presented.
Back to those well-versed corporate suits, who collectively offered very little in the way of new information to the near-term Wal-Mart story; hence the stock's pullback on the day. Yes, the market got the pound of flesh it expected in the new $15.0 billion share repurchase authorization. Yes, Wal-Mart is finally going after with vigor a dominating Amazon (AMZN). Yes, a return to Mr. Sam's EDLP (everyday low price) model globally will eventually positively influence long-term performance.
Smaller format stores under the Wal-Mart Express banner excites me, and signal that management remains steadfast in not acquiring growth to make inroads into urban areas (if you think about it, Wal-Mart didn't acquire rural businesses during its explosive growth phase; it just put them out of business with a newer model). So why did the suits disappoint the masses?
At this point, the lack of an identifiable turnaround in the U.S. business trumps an underappreciated international growth story. CEO Mike Duke reiterated that U.S. comp growth was his "greatest priority" and that it's "gaining traction" in that area. "Gaining traction" is vastly different than "improving comp trend" or "encouraging comp trend." Duke is asking investors to buy the stock in the traction gaining phase, which is being met with a cold investor response, seeing as two-year comp performance has been stagnant and competitors are printing far superior sales results.
The language suggests to investors that the combination of EDLP and reappearing merchandise is being noticed by customers, but not to the extent as to regain boatloads of lost share of their weekly and fill-in shopping budgets. Until the U.S. shows that a light at the end of the tunnel exists, which in turn would trigger a stronger margin outlook, it will be difficult to warm up to the stock.
Share Repurchase Program in Focus
I received questions on the company's new $15 billion share repurchase program and how it virtually guarantees that the Walton family will (potentially within a few months) control over 50% of the common stock. In doing so, the company would qualify for the "controlled company" exemption from NYSE listing standards requirements relating to board independence, meaning this could be the last annual shareholder meeting where the company is required to maintain an independent board or complete independence on key committees.
I first have to wonder if the aggressive share repurchase activity of the past three years was designed to reduce the share count so much that the "controlled company" provision was triggered. Then, I have to wonder why the Walton family would want to do this (especially given prominent lawsuits), which from what I can see is to regain a strong hold on the future direction of the company in light of the 10-year middle of the road performance of the stock (the direction is poised to change dramatically in its "global" push). From a shareholder perspective, I would want to see the company maintain complete independence on key committees; power in the control of a few, especially with such a large global company, is not friendly.
