Although Wal-Mart is still a safe investment and analysts are upbeat about general stock performance, don't underestimate its many competitors, especially as they continue to break into emerging markets in the second and third world. For instance, PriceSmart, the "Costco of South America" is a company that missed earnings expectations, yet still continues to impress investors because of its gutsy decision to implement a thin-margin strategy in an attempt to increase traffic through its doors. Despite the fact that it missed earnings predictions, PriceSmart surpassed revenue forecasts by some $10 million and grew in revenue by 22% last year alone. Revenue growth was not only by expansion, either, but in same-store sales, proving that the gutsy move to drive traffic to stores works.
Competition from other stores is not the only thing Wal-Mart is facing. The company is also facing opposition from individuals who simply do not want the store in their communities. Wal-Mart has seen expansion plans drastically dashed from various communities that have taken a stand against the company, most notably the Washington, DC, area, where six stores were planned to open by 2013. However, the plans were reduced and now only one of the six planned stores will open by the end of 2013. The others have been put on hold indefinitely, although it does seem that they will go ahead when Wal-Mart determines that it has penetrated the communities well enough and the economic and regulatory circumstances are in place to make the stores economically viable.
Finally, multinational companies such as Wal-Mart will run into trouble every once in a while. Several weeks ago the New York Times ran a story alleging that officials in Mexico were using bribes and coercion to increase expansion of the company's presence in Mexico. Worse, the article chronicles how the company may have suppressed information about the incidents in 2005. Although the claims were first dismissed, the company now claims that it has launched an internal investigation. Both the Mexican and American governments are considering bringing criminal charges to the company and have launched their own independent investigations. If found guilty of violating the Foreign Corrupt Practices Act, the company could face a long legal battle, exorbitant lawyers' fees and huge fines levied by the federal governments of both the United States and Mexico. The law, once neglected, is now solidly enforced. In 2004, the Department of Justice enforced two actions. In 2010, the DOJ enforced 48.
The good news about Wal-Mart is that it still holds a place as one of the two largest online consumer electronics outlets in the United States, rivaled only by Amazon (AMZN). Best Buy (BBY) is endeavoring to eke out a market share, but Amazon dominates the market with 60% of the market share and Wal-Mart, though a distant second, is second, with 22%. Best Buy is close to Wal-Mart, with 14% of market share. Although Amazon has a large percentage of market share, it has a much smaller lead in share of sales, with only 39% of sales compared to Wal-Mart's 33% of sales (Best Buy has 23% of Sales and Target (TGT) has 4%). Amazon also has lower value per order, about $103 versus Wal-Mart's $189.
Wal-Mart is not only feeling the heat from Amazon when it comes to online consumer electronics. Competitor Target is starting to view Amazon as more of a threat than a friendly partner, and has announced that it will phase out its e-reader, Kindle, by mid-May. Instead, Target has signed a deal with Apple (AAPL), selling iPads, iPods, iPhones and other Apple products in stores. Wal-Mart already offers iPads, as well as Kindles, but this shift in attitude toward Amazon may be contagious as other large giants feel threatened by the online giant's growing market share and brand recognition.
Target, the closest national competitor in terms of similar services and products, has been unable to compete with Wal-Mart in terms of popularity and mass appeal, despite its reputation as an up-market version of Wal-Mart. Although Target is one of the ten largest retailers in the U.S., with yearly revenues of $69.86 billion in 2011, it comes nowhere close to touching Wal-Mart's worldwide brand recognition. Wal-Mart's astonishing brand recognition in comparison to Target's small renown, especially given that both companies were founded in the same year, 1963, could be explained by Target's smaller marketing budget and strategy. Target focuses on more affluent households with higher incomes and levels of education. Target's reputation as a middle- and upper class superstore has made it especially difficult for the company to become successful in parts of the country where there is a small or nonexistent market for its target customers.
Wal-Mart is one of the world's most recognizable store names, and despite the competition, it is still a safe stock with a good dividend payout, which is rare in an economy of low interest rates and volatile stocks. One share currently sells at about $58, and there has been an average 17% annual dividend increase per share since 2007. In 2011, Wal-Mart investors enjoyed a 21% dividend increase, rivaled only by BHP Billiton (BHP), Union Pacific (UNP) and Accenture (ACN), each of which had 21%, 47% and 64% dividend increases last year, respectively.
Despite legal woes, growing pains, and the heat of competitors nipping at its heels, Wal-Mart will continue to diversify in new ways, as it has proven time and again for the past 50 years that it has the ability to do so. From entering the online electronics market to expanding to second and third world economies, Wal-Mart will continue to grow with the times and prove a valuable addition to your portfolio.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.