2 Alternatives To Big Bad Wal-Mart

Includes: AMZN, JCP, SWY, TGT, WMT
by: Stocks & Shares

Wal-Mart's (NYSE:WMT) 11-year-old gender discrimination lawsuit weaves in and out of the news. This is only one example of Wal-Mart's terrible labor relations, a serious issue that puts a black mark on the company's brand.

Investors can find cheaper values among some of Wal-Mart's department store and grocery competitors. Choosing these Wal-Mart alternatives is a smart way to avoid this public relations nightmare altogether.

Wal-Mart's Bad Press

This gender discrimination lawsuit was first filed in 2001 by women from a few different Wal-Mart locations in the California area. They state that they were denied salary hikes and career growth because they are women. The workers' lawyers convinced a judge that Wal-Mart's policies affected women at many of the stores all over the country, qualifying the case as a class action lawsuit. Wal-Mart appealed the class action certification, claiming that promotion and hiring decisions were made by local managers and were not a company-wide policy.

The discrimination lawsuit was started on behalf of Californian workers after the U.S. Supreme Court threw out a lawsuit representing employees of Wal-Mart across the nation. A U.S. Judge said that the plaintiffs have reduced the class size to between one and a few hundred thousand members. This reduced class might be certified if it can make a "showing consistent with the Supreme Court's decision."

Wal-Mart requested to dismiss the case because the reduced class size doesn't the change issues reviewed by the Supreme Court. This request was rejected by Judge Charles Breyer.

Peer Comparisons

As investors we should ask if Wal-Mart shares are trading low enough at $75 to compensate investors for its tarnished brand image. When compared with the 1.29 price-to-sales ratio of the S&P 500, the 0.55 ratio of this stock is very attractive. WMT shares are trading at a fair 15.82 price-to-earnings ratio, in line with the S&P 500 average. The 3.61 price-to-book multiple of this stock is higher than the 2.05 S&P 500 price-to-book ratio. The firm is financially stable with a manageable 0.78 debt-to-equity ratio.

The 2.12% dividend yield of the WMT is comparable to the 1.74% 10-year treasury yield. Future dividend payments are likely because the company pays out 0.32 of earnings as dividends, so earnings could drop considerably before dividends must be cut.

By comparison, discount and variety store Target (NYSE:TGT) stock is a better investment at $64 per share. Its 14.69 price-to-earnings ratio and 2.64 price-to-book ratio are lower than those of Wal-Mart. Its 0.59 price-to-earnings ratio is comparable with Wal-Mart. Clearly, there is no valuation penalty being priced into the shares of Wal-Mart that would justify picking it over Target. Target has nicer valuations without the yucky labor issues. The dividend picture is also slightly better for Target. Its 2.24% dividend yield and 0.27 payout ratio are slightly better than those of big bad Wal-Mart.

An even better alternative to Wal-Mart is Safeway (NYSE:SWY), which recently traded at $16 per share. The -21.1% drop in price over the past year has made it a bargain. Its 0.09 price-to-sales ratio and compelling 8.74 price-to-earnings ratio beat the pants off of Wal-Mart. The price-to-book multiple of this stock is 1.5, cheaper than the 2.05 S&P 500 average.

It is also a better income investment than Wal-Mart. SWY stock pays a hefty 4.33% dividend, which is more than twice the 1.74% 10-year treasury yield. These high dividend yields are likely because the company pays out 0.31 of earnings as dividends, so earnings could drop considerably before dividends must be cut.

Furthermore, investors who buy shares of Safeway also stand to benefit from the spin-off of Safeway's gift card business. Spin-offs generally benefit investors as the parts of the original firm are usually valued more than the whole. Safeway announced that its gift card business, Blackhawk Network Holdings, is planned to IPO in the first half of 2013.

Not all of Wal-Mart's competitors are better investments. Some face worse issues than bad brand management and terrible labor relations.

Whole Foods Market (WFM) stock is too expensive at roughly $101, a price level that seems impossible to justify. The firm's 1.68 price-to-sales ratio is much higher than that of Wal-Mart, Target or Safeway. WFM shares are trading at a lofty 43.24 price-to-earnings ratio, three times the 14.1 PE ratio of the S&P 500. The 5.13 price-to-book multiple of this stock is also high. These valuations are too high for serious consideration.

There are serious management issues at J. C. Penney Company (NYSE:JCP), which make it a worse investment than Wal-Mart. The company is disappointing investors based on its strategy change under the leadership of CEO Ron Johnson. Retail analyst Howard Davidowitz predicted problems with J.C. Penney's new strategy and leadership. In an interview he stated

"J.C. Penney didn't need a revolution, it needed an evolution. You can't take an old line company that's been operating the same way a very long time and throw everything out the window and say 'now we've reinvented the company.'"

Mr. Davidowitz questioned Ron Johnson's appointment as a CEO of a department store because Johnson's experience at Apple (NASDAQ:AAPL) doesn't translate directly to retail. Mr. Davidowitz's concerns were later validated in a 20% drop in sales in J.C. Penney. Mr. Davidowitz is particularly critical of Mr. Johnson's abandonment of promotions and couponing.

Though JCP shares are cheap at a 0.34 price-to-sales ratio and a 1.43 price-to-book multiple, they are not cheap enough to get on this roller coaster of a stock. The issues facing J.C. Penney investors trump the issues facing Wal-Mart investors. J. C. Penney is a not a superior alternative to Wal-Mart.


Wal-Mart does not provide a discount for its bad press relative to Safeway or Target shares. Investors should consider SWY and TGT stock alternatives to WMT shares because they are trading at lower valuations and have brighter brand images. They are also the highest dividend-paying stocks considered here.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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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