The Wal-Mart Barometer: Ground Hog Edition
May 25, 2010
Wal-Mart released its latest quarterly earnings this past week. The release cements a perception of weakness now held by Wall Street about the ultimate main street stock. “For every positive facet of the quarter, there seemed to be twice as many negatives,” one analyst reported to Barron’s. Ouch.
Times sure have changed. On the front side of the global recession, Wal-Mart’s earnings, quarter after quarter, demonstrated the company to be a juggernaut with flawless management execution. Sales growth consistently beat estimates, margins always improved, and efficiencies continued step-level improvement. As one example, the company’s earnings release at this time last year demonstrated a cash flow increase of $2.5 Billion (see earlier edition of Wal-Mart Barometer for details).
That was the old model. The new model shows cracks, with the biggest one being the deteriorating growth of its U.S. stores. Wal-Mart’s latest release marked the eighth straight quarter of sales declines in U.S. same store sales. The same store sales decline of 1.1% came in below company expectations set by the company. It has been decades since the company has been in this position, facing increasingly skeptical investors on its heels. The core explanation for these results is the stretched economic state of their consumers. With gas prices rises and economic uncertainty high, management cited these broader reasons for their predicament. Yet other retailers, such as Target, are not suffering as much. This is leading some analysts to conclude that they are losing market share in a time when low income consumers should be viewing Wal-Mart as a refuge.
The company’s success abroad helped it once again top overall expectations. The growth outside the U.S. remains blockbuster. The company’s market growth priority continues to be international markets. But with much smaller margin contribution internationally, Wal-Mart’s share price will continue to suffer as a premium is put on restoring the U.S. picture to maintain historical margins. The model outlined to Wall Street includes outsized international growth funded by U.S. profitability (for details, see an earlier edition of the Wal-Mart Barometer). Without those domestic margin levels, the internal profits to fund international growth is depleted. The company’s debt levels are at its highest levels in at least four years. More debt will likely be needed as long as the current U.S. sales picture continues.
Over the past year, the company threw out the strategy of consolidating the number of items it carries, veering away from every day low price, and revamping stores to attract more upscale consumers. That strategy was deemed a failure and is gone. Many of the company’s partners and consumers rejected it. What is not clear is a coherent strategy to take its place and repair the damage. There is certainly a lot of experimentation going on. The company is experimenting with its online business. It is retrenching to recapture its core base of low income consumers by tailoring its packaging at lower price points. It is looking to include tablets and other electronics into its assortment to spur demand. What is not yet clear to the market is a more coherent strategy that combines these initiatives into a defined commitment to improve performance. It does not appear that management is offering one. They are likely the most challenged by the law of large numbers. It could simply be that the Wal-Mart store has simply reached a saturation point, where any significant change will not contribute enough to return the company to U.S. growth. Perhaps that is why management is considering more formats as the ultimate answer.
The challenge of returning U.S. store growth is daunting due to Wal-Mart’s size. Recapturing growth will take a clearer strategy, a continued recovering economic picture, and more than a little luck.
