Is the Wal-Mart Era 'Drawing to a Close'?

A front page article in the Wall Street Journal Wednesday argues that the Wal-Mart (WMT) era is 'drawing to a close'. The evidence diligently provided by the author of the piece is anecdotal and not entirely convincing. Since the stock has undergone a massive derating, we can perhaps count the WSJ story as part of the magazine indicator, which states that by the time a trend makes it on the cover of a major publication, that trend itself is about to reverse. Paraphrased below are some of the arguments presented in the WSJ article and our comments:

WSJ: Many shoppers are avoiding Wal-Mart because they are looking 'for greater convenience, more selection, higher quality, or better service'. Americans have grown richer and they are looking for more than just the lowest prices. Wal-Mart's focus on scale has turned from being its major strength to being a weakness. Consumers want more choice, freshness and service. Our comment: True for now, many people may prefer to shop at smaller more specialized stores, whereas years ago they could only afford to shop at Wal-Mart. But let us see what happens at the next recession, when a large segment of consumers will have to move downscale again, and refocus exclusively on price. It is risky to interpret what may be a cyclical development as a secular change in consumer habits.

WSJ: Companies like PepsiCo and Procter & Gamble have become less dependent on Wal-Mart. PepsiCo has recently chosen Whole Foods Market instead of Wal-Mart to launch a new energy drink. Our comment: We would not view the PepsiCo decision as meaningful. An energy drink has a more natural audience at Whole Foods than at Wal-Mart. Furthermore, PepsiCo will probably want to sell the new drink at Wal-Mart at some point.

WSJ: Wal-Mart's international effort has stumbled in 'affluent markets' such as South Korea and Germany. Our comment: True, but can you say Mexico? The growth of Wal-Mart Mexico has been a huge success story and a strong driver of earnings.

WSJ: Many companies in business history manage to capture and to maintain a leadership position for a long time but they eventually lose that position due to new competition, new technology, new consumer habits etc. Our comment: True, but this is the point that remains to be proven, is it not?. Is this happening to Wal-Mart now, or will it happen five, ten or fifteen years from now?

WSJ: Comparable-store sales at Wal-Mart have lagged those of Target and Costco this year. Our comment: Nine months are not enough to make a reliable secular case.

WSJ: Wal-Mart shares have flatlined since 2000. Our comment: The stock had a huge move between 1997 and 2000, rising from 10 to 70. It subsequently weathered the 2000-02 bear market relatively well. Since the market lows of 2003, WMT has been a clear underperformer however. From 2000 until today, the valuation has been derated considerably from 40x to 15x. At the current valuation, it could be argued that the stock has priced in the negatives discussed in the WSJ article.

WSJ: Citizens Thomas Kim and Melissa Morris avoid Wal-Marts because the stores are too crowded. Our comment: As Yogi Berra said, 'no one goes there any more, it's too crowded'.

We have a different take on the Wal-Mart story. Between 2000 and 2007 (fiscal year ends in January), revenues have grown from $153 billion to $345 billion and diluted earnings per share have grown from $1.19 to $2.71, equivalent to growth of 125% and 128% respectively. The bottom line was helped by a slightly declining tax rate, but the income growth shows there has been no margin erosion despite a doubling of the company's size.

Wal-Mart may be experiencing some pressures at the top end of the consumer market as more Americans have become richer and have traded up for a better shopping experience. At the bottom of the market, subprime woes and a rising oil price have reduced discretionary spending among less well-off Americans. If the economy does well, discretionary spending will improve again. If the economy deteriorates, some of the more affluent shoppers will start returning to Wal-Marts. A bellwether like Wal-Mart is exposed to many competitive challenges, but it also benefits from many buffers in different economic scenarios. Its scale and broad offering can provide it with more flexibility to adjust to changing conditions, whereas a more upscale format cannot do so without damaging its brand equity.

At the current valuation, and barring a serious recession, it would be foolish to write off Wal-Mart stock.

Disclosure: The author has no position in WMT stock

Comments

[William Eichler]

Good article ... lets not forget WMTs push into health care centers.
They would provide nurse services, home health equipment, prescription glasses, and pharmaceuticals. They hope to have 2,000 clinics within five to seven years. WMT has 300 different banks, with 1,200 branches, inside WMT stores. They plan to add 200 more by 2009. The re-negotiated leases give WMT the explicit right to offer mortgages, home-equity line of credit and consumer loans. Plus 170 MoneyCenters. Their success with electronics from Hewlett-Packard, Samsung, Sony, and Dell. And finally, the search for a M&A executive. There is more but ....

2007 Oct 05 03:43 PM

[Bust 6576]

This comment originated in Bentonville, ARK!
WMT has been flat for the last 6 years and will remain that way under present business modeling. The only way to evaluate this company is to be aware of what WMT hasn't done - then answer the question why, in relationship to the management of the company. The true answer is their stock performance. Then ask what is WMT not doing today in relation to the earlier answer. You will see that tomorrow is inevitable for WMT a past & present non performer!!

2007 Oct 05 06:05 PM

[mbaglio100]

1999 Price: $45 and change.
2007 Price: $45 and change.

Consider: For the entire investing life of a significant percentage of investors, WMT has gone _nowhere_.

How, by any measurement, could this be considered a "Long Idea"?
A better long idea would be a <YIKES!> passbook savings account.

...wondering why _any_one would ever own this stock...

2007 Oct 07 11:21 AM

[logicalsinger]

For a true value investor, the lack of performance since 1999 would be a reason to take a look now. Also the time frame you chose amounts to a bit of data mining. If you had counted from 1997 instead of 1999, you would have seen a rise from $10 then to $45 now. That is equivalent to 16% CAGR. If you now a passbook account with this kind of return, please let me know :)

2007 Oct 07 03:35 PM