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Feb 222011
 

While watching CNBC today, one of the big stories was Wal-Mart’s quarterly earnings. While earnings beat analyst’s expectations by 3 cents, the stock is down in this afternoon’s trading session because Wal-Mart’s U.S. same store sales were down 1.8%, marking the 7th consecutive quarterly decline.

For those of you in the dark about same store sales, the metric is relatively simple. It measures sales in stores that have been open for at least a year, comparing that number to last year’s period. It’s considered a key metric for retailers. While same store sales haven’t been great for retailers in general, (thanks to mediocre consumer activity in general) other retailers have managed to eke out small gains.

Wal-Mart is in a tough spot. While they did well during the economic downturn, they’ve struggled as more affluent consumers have migrated to higher end stores as the economy recovered. Stores like Target and Sears showed a slight increase in same store sales, indicating Wal-Mart shoppers are making the move to these stores. Dollar stores have also seen soaring popularity since the recession, taking Wal-Mart’s traditional demographic. Add all of these together and you get weaker sales for Wal-Mart.

Wal-Mart has been making efforts to take their stores a little higher in the market. The clothing section has been revamped, with the retailer bringing in clothes that are a little more trendy and higher quality, essentially copying what Target has done. Wal-Mart also invested heavily in toys for the Christmas season, an investment that didn’t translate in increased sales. Wal-Mart execs blamed their large product sizes on things like detergent and toilet paper for the sales weakness as well, implying that lower end customers just couldn’t afford the large sizes.

Another problem for Wal-Mart is their weakness in credit. I don’t know current numbers, but when I was a shareholder in Sears Canada back in about 2006, over 50% of purchases at Sears in Canada were made on Sears cards. Besides the sales, retailers also get the profit on interest charged on the credit card. Over half of Sears’ profit was from their credit division. Wal-Mart’s credit division is still in it’s infancy, with only 20% of purchases coming from some sort of credit card. When people have a store credit card, they buy more, it’s that simple.

While the company is struggling in the United States, it’s still growing sales internationally. The company is a behemoth, recording revenue of over a half a trillion dollars annually for 2010. The problem with a company that large is even 10% growth annually becomes next to impossible, simply because of their sheer size. Picking up an additional $50 billion a year in revenue is no picnic. To put the number in perspective, Loblaws (Canada’s biggest retailer) has annual revenue of $30 billion.

Wal-Mart’s struggles with their staff have been well documented as well. Wal-Mart has been accused of paying their staff peanuts, hiring illegal immigrants, withholding overtime pay to eligible employees, not offering affordable medical coverage and sexism against women. It’s no wonder unions are chomping at the bit to unionize Wal-Mart associates.

I’m not sure there’s a more hated company in America than Wal-Mart. Besides what I mentioned, they’re blamed for the demise of American manufacturing, the struggles of locally owned small business, numerous environmental sins, as well as securing their new stores all sorts of perks from willing communities. There are numerous websites, books and documentaries out there that portray an anti-Walmart message. All sorts of people have responded by taking their shopping to other stores.

I deliver potato chips to Wal-Mart everyday. Wal-Mart has the classic bloated big company sickness. Inefficiencies run rampant, there are all sorts of store policies that make no sense. Since wages are so low, Wal-Mart is forced to hire people who are dumber than my big toe. Management seems to either try too hard or not hard enough, resulting in staff that resent them.  Admittedly, my sample size is small, so take it with a grain of salt. Ultimately though, finding good staff to run a growing number of stores is difficult.

Every massive retailer seems to reach an apex, then crash and burn. A&P dominated U.S. grocery in the early 1900s. The company began a slow decline which inevitably ended in their bankruptcy last year. Sears dominated U.S. general merchandise for a similar time period, before being overtaken by discounters like Wal-Mart and Target. In Canada, Hudson’s Bay Company peaked in the 1980s, only to slowly lose market share over the next 30 years.

Is what we’re seeing the beginning of the end for Wal-Mart? The market isn’t in love with the name anymore, the stock only trades at 10x earnings, a valuation typically reserved for unloved stocks. Other retailers are doing a better job than Wal-Mart, as evidenced by the decline in same store sales. Wal-Mart is more and more dependent on acquisitions to fuel growth.

I’m not bullish on Wal-Mart going forward. Perhaps they’re not going away, but I don’t think the stock is a buy at these levels.

Readers, are you bullish or bearish on Wal-Mart? And if you worked there, how excited would you be to do the morning cheer?

Tell everyone, yo!

  14 Responses to “The Beginning Of The End For Wal-Mart?”

  1. It’s no secret that Wal-Mart’s stock hasn’t gone anywhere for the last 10 years, but I think they are doing what they need to do by growing at a fast pace internationally to combat sluggish domestic sales.

    I don’t know if those companies (A&P, Sears, HBC) offer a fair comparison to Wal-Mart, they aren’t even on the same planet as far as revenues go. Maybe a company like Coke would be more representative?

    Wal-Mart has been doing a lot to repair their reputation, most noticeably through their green initiatives in their super centres, as well as their cooperation with the US Gov’t to bring in healthier foods.

    Can’t do too much about the workers, you get what you pay for. But that aside, I can’t see Wal-Mart going anywhere but up in our life time.

    • A&P had 16,000 grocery stores in the U.S. in the 1930s, with revenue over $1B. In the 1930s! In the 1950s, the government began serious discussions to break up their monopoly.

      Sears was the largest retailer in the U.S. in the 1950s. They merged with K-Mart a few years ago and the combined company barely holds a candle to Wal-Mart.

      I assumed HBC dominated the Canadian market at some point too, but I can't find additional info to back that up.

      The point is, the mighty have fallen before in retail. I don't know if Wal-Mart will too, but they definitely have problems they need to fix.

      • But nobody has been THIS mighty before. You're talking about companies who dominated a domestic market. From a total revenue perspective they are number 1 in the world, ahead of number 2 by over $100 billion. They have triple the revenues of General Electric. They have 3.5 times the revenues of the next biggest retailer in the world (Carrefour).

        The reason they can get away with employing idiots and making people wait in line is that, guess what, people love cheap stuff!

        Tapping out the international market (as Fabulously Broke suggests) is not going to happen anytime soon. And as you point out, they are severely lacking in the credit department, so perhaps that is the next growth opportunity (I recall them attempting to open banks in Mexico a few years ago).

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  3. You gotta be kidding me…the morning cheer ? I'd rather turn to prostitution than work as a WalMart greeter.

    I hate WalMart the only time I'll shop there is to buy their loss leaders which cost them money hahaha

    Hey, Walmart, my time is worth something, if you make me wait in line for 30 minutes to save 2$, I'll be making 4$ per hour except, my time is worth a lot more than that to me. That is the main reason I don't go to WalMart they don't respect my time and make me wait in line. If you haven't seen http://www.peopleofwalmart.com you haven't busted a gut laughing yet.

    • peopleofwalmart is good for a few laughs, for sure.

      I'm usually in the store around the time they have their morning meeting. I've watched the cheer, and it's funny.

      Your reasons for avoiding Wal-Mart are shared by many others, which is why I think Wal-Mart may have reached its apex.

  4. Just as we can only make so much money per year as our potential, Wal-mart can only grow so much

    What happens once they saturate the entire world and also tap out China, Brazil and India? Growing even 0.5% each year is a massive feat for such a big conglomerate.

  5. I agree about this. I have to say that I am fed up with the people who are at the check out lanes. I know they are just trying to make a living but they are so rude and are always messing up my stuff. I wish they would get better training. http://thefirefinder.com

  6. Wal-Mart is a reflection of a mature and stalling US economy. However, unlike the US economy, it has great opportunities to expand abroad. The dividend hike was a good move today and as they continue to press into emerging markets, I'm sure investors will reassess its valuation.

  7. […] Financial Uproar wonders if This is the Beginning of the End for Wal-Mart? […]

  8. […] airlines. An entrenched union and poor quality product helped kill the big 3 American car makers. Discount retailers like Wal-Mart and Target killed all sorts of traditional grocery stores, including A&P. While I’d argue […]

  9. […] of my favorite posts to write was where I questioned the growth prospects of Wal-Mart long term. Yes, I realize they’re the biggest retailer in the world. But how long can they keep with […]

  10.  In Canada, There are many immigrants who speak English with some accent or broken English. These people usually get hired by Walmart Canada, because no company respects their education and work experiences. I see that many people here know how awful to work at Walmart, but they seem they do not know that we need changes in the North American society. In addition to English, French is also must-have language skills to get any good jobs such as ones in Air Canada, and in the federal government in Canada. This facts make skilled and educated immigrant such as the ones from Japan or Korea extremely difficult to get their stable and well-paid jobs. Learning French is not easy especially for Asian-language speakers. If you study Chinese, you’ll imagine how hard it would be for you. I have to say that it is EXTREMELY unfair that even Asian immigrants MUST speak and use French as their 3RD language to get a good job!!!  You people blame that Walmart’s customer services are awful, but fluent English speakers such as you on this website do not respect skilled immigrant unless they speak PERFECT ENGLISH! As a result, skilled immigrants end up working at Walmart with disappointment. That is why customer services at Walmart is not great. If some of you love Asian cartoons or immature-looking Asian loli girls, you should contribute to accept these Asian immigrants as a skilled worker in the society!!!!!!!!!!!!!!!!

  11. […] insurance. Yet I’m also willing to bet that most readers would be honest with the cashier at Wal-Mart if she gave them too much change. If someone can explain the difference between the two situations, […]

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