Whither the World’s Biggest Retailer?

Years ago, I ran across Sam Walton, the late founder of Wal-Mart Stores, at the Kentucky Derby. During a brief chat, I mentioned that some Wall Street analysts were worried about slowing growth at the company and the ability of the stock to sustain its momentum.“To hell with Wall Street,” he said. “If I let Wall Street analysts run this company, they’d run it into the ground. We’ll have our ups and downs, mostly ups,” he said, “but the thing to keep an eye on is who’s first at the finish line. And that’s going to be us.”Perhaps he wouldn’t be saying that if he were still around today. On Tuesday, Wal-Mart reported a 6% profit growth in its second quarter, its smallest quarterly profit gain in four years. Indeed, as the world’s biggest retail chain, Wal-Mart – which is running afoul of increasing competition from the likes of Target and CVS – does place first at the finish line in terms of size. But as a stock, Mr. Walton’s forecast no longer holds water. It’s not only miles from the finish line, but it has been performing like an also-ran for several years.Jeannie Wolfe, a home nurse, can attest to that. In 2002, she bought Wal-Mart, her first and only stock, at $61.75, just a shade below that year’s high of $63.94. The stock has been a dog ever since. It wrapped up that year at $50.51, finished the following year at $53.05, and closed yesterday at $47.24.In a recent e-mail, Ms. Wolfe wrote, “Dan, What’s wrong with Wal-Mart? I know a lot of funds love it but it has been a real dog for me. Should I take my lumps and get out?”For starters, Jeannie, not that it’s any great solace, but you’re not alone. Wal-Mart, down more than 30% from its 1999 peak of $70, has traded between the mid-$40s and a hair under $64 for more than three years even though sales and earnings are much higher today than when they were at the stock’s 1999 peak.In its latest January 2005 fiscal year, for example, Wal-Mart posted sales of $285 billion, up nearly 73% from fiscal 2000. Over the same period, per-share earnings jumped 88% to $2.41 a share. Despite this impressive growth, the stock over the five years has been stripped of nearly $100 billion of market value.It all begs the question: What’s awry? One analyst, Charles Carlson of Dow Theory Forecasts, a well-regarded investment newsletter in Hammond, Ind., figures the bearish case is pretty clear – notably slowing growth, lack of support from both growth and value oriented investors, and a customer base hurt by higher oil prices.The stock’s malaise, he observes, also reflects the “law of big numbers.” Simply put, as we all know, growing 15% a year is much more difficult for a company with sales of $1 billion than it is for one with sales of $100 million. To put Wal-Mart’s size in perspective, Mr. Carlson notes, if the retailer were its own country, its economy would rank 31st in the world, ahead of Austria, Switzerland, Sweden, and Greece. In fact, he points out, Wal-Mart’s $285 billion in sales last year – expected to grow to more than $315 billion this year – are greater than the GDP of Ireland, New Zealand, and Puerto Rico combined.Still, when you look at the one metric that drives retailers, which is same store sales growth, Wal-Mart is clearly slowing, having fallen to 3% in fiscal 2005 from 8% in fiscal 2000.So what will get its stock off the mat? First, a break in the upward cycle of oil prices would help. And second, Mr. Carlson said, reinvigorated same store sales growth – namely, in the 4% to 6% range – would do wonders for the stock, he said. Wall Street, he added, wants to see improvement in same store sales.That indeed is what it saw in June, as Wal-Mart reported 4.5% growth, the highest monthly gain since May 2004. July followed with a 4.4% rise. Indications, Mr. Carlson observes, are that the numbers are picking up.So is it time to buy the stock? It depends on your time horizon, he said. “For short-term action, the answer is no. But looking a year out, I think we’re talking about a $65 stock.”Bear Stearns also sees sunnier days ahead for Wal-Mart, projecting that easier sales comparisons and merchandising improvements will drive earnings in the second half. It recently reiterated its “outperform” rating with a 12-month target of $57-$58.Maybe the bulls are right, but a successful Los Angeles day trader, Arnold Silver, who believes that “Wal-Mart’s golden days are behind it,” disagrees. He’s short the stock (a bet its price will fall), theorizing that “it’s not that easy to turn around the Titanic.”

Whither the World’s Biggest Retailer?

Whither the World’s Biggest Retailer?

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