Wal-Mart Downsizing, Take Profits While You Can

| About: Wal-Mart Stores, (WMT)


Wal-Mart has reversed course on its expansion plans and begun downsizing.

Same store sales may improve a year from now, but near term results will be hurt.

It was a great trade, but take profits while you can.

At the start of the year I recommended readers buy Wal-Mart (NYSE:WMT) and you made money.

You might make still more - a march toward 70 is certainly possible - but the stock is unlikely to move much beyond that, and is far more likely to revert to the mean of its peers.

My call on Wal-Mart was based largely on its underperformance in the stock market, relative to peers like Target (NYSE:TGT). I thought it was overdone. While over the last year Dollar General (NYSE:DG) and Costco (NASDAQ:COST) are just about flat, and Kroger (NYSE:KR) shows a small gain, Wal-Mart is down 22%, even with its recent move upward.

Paying a below-market P/E for a company generating nearly $30 billion in positive cash flow each year seemed silly to me, especially at a time when the rest of the market was weakening and risk-off was coming into vogue. Yeah, I got the idea that the company wasn't growing, but the stock was just too cheap.

Part of my call, however, was also based on Wal-Mart's desire to change. Raising some salaries, and expanding into grocery or gas station niches, trying to break-bulk for e-commerce at the store level rather than in a giant warehouse, all that made sense. CEO Doug McMillon seemed like a different kind of Wal-Mart executive.

Well, he's not.

As revealed in its latest earnings statement and on its subsequent conference call, Wal-Mart isn't really changing at all. The grocery stores are being closed, the gas stations never opened, and even some SuperCenters are being shuttered after the life of the towns they were in had been sucked dry. The company's customer service has not improved and, what's worse, the e-commerce plan now appears to be copying Amazon.com (NASDAQ:AMZN), with giant fulfillment houses, and expensive Silicon Valley talent rather than an attempt to tap the creativity in the rest of the country.

I now believe Wal-Mart is more under the control of Sam Walton's heirs than it has been in decades, thanks to stock buybacks, and while his desire was to see his associates make millions on the company's stock, the heirs (none of whom work there) are in it for themselves.

None of this is to say that my call was wrong. Wal-Mart was oversold. But it turns out to have been a short-term deal. What's left of McMillon's growth strategy is a move of SuperCenters closer to major population centers, and the hope that his clone of Amazon can gain traction. All the company is really doing is changing-out some of its customers for newer, wealthier models.

When Wal-Mart announces earnings again in April, and again in July, expect sales to be down on the closings, and for profits to be meager, due to the cost of the closings. Same-store sales and margin improvements will likely only appear a year from now. What this means to me is that the purchase of Wal-Mart stock in January should be viewed as a trade, and you should be looking for a comfortable place to take profits.

Disclosure: I am/we are long AMZN, KR, COST.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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