WAL-MART STORES, INC. $46 (New York symbol WMT; WSSF Rating: Above average) is the world’s largest retailer, with roughly 6,100 discount department stores in the United States, Canada, Latin America, Europe and Asia.
Despite its worldwide presence, Wal-Mart still generates 80% of its sales and 85% of its profits in the United States. It has a great growth record and plenty of long-term growth potential, here and overseas. Yet it trades below the market’s average p/e ratio, now around 18.7 on the Standard & Poor’s 500.
The company’s sales rose from $217.8 billion in 2002 (fiscal years end January 31) to $312.4 billion in 2006. Profits rose from $1.50 a share (total $6.7 billion) in 2002 to $2.68 a share ($11.2 billion) in 2006.
A big part of its success grows out of its computer expertise, which helps it keep inventory costs low. This technology also helps ensure that stores do not run out of merchandise, or stock slow-selling goods. It also helps stores quickly respond to local buying trends.
The company uses an everyday low price strategy to attract and keep customers, instead of relying on sales. This helps keep its advertising costs down. It also uses its vast buying power to demand discounts from suppliers, which lets it keep prices low.
Selling groceries fueled big gains
Wal-Mart began selling groceries eight years ago, and has become a leader in the field. It now operates close to 2,000 supercenters, which combine its regular store format with a full-sized grocery store under one roof. Most people shop for groceries more often than for other goods, so Wal-Mart’s supercenters draw more traffic than its regular stores.
In the 1980s, Wal-Mart was a pioneer in “members only” warehouse clubs, where consumers and small businesses can buy in bulk at discount prices. Its 570 Sam’s Club stores now supply 13% of its sales. Sam’s Club now carries more upscale merchandise, to appeal to more affluent shoppers. It also offers property and health insurance and other financial services.
Wal-Mart usually prefers rural and suburban locations, where land for parking lots is cheap. However, it hopes to build sales by building new stores closer to city centers.
The company also aims to grow overseas. Acquisitions, mainly in Brazil and Japan, increased Wal-Mart’s overseas store base by 43% in fiscal 2006. The company also operates 56 stores in China through a 65%-owned joint venture, and plans to open over 100 new stores in the next few years.
The company expects to spend $4.20 a share on capital upgrades in this fiscal year, up 20% from $3.48 in fiscal 2006. It will probably generate $4.10 a share in cash flow this year, and borrow the extra cash it needs. But its long-term debt is just 0.6 times equity, so it can comfortably borrow more.
Costly fuel could draw new customers
Rising gas prices could hurt spending this year, particularly among lower-income consumers who make up the bulk of Wal-Mart customers. Higher gas prices will also increase the company’s transportation costs. However, high fuel costs — like soaring prices for real estate— may broaden the company’s customer base, as middle-class bargain-hunters switch to Wal-Mart.
Wal-Mart will probably earn $2.92 a share this year. The stock trades at 15.8 times that forecast, and at 60% of its sales per share of around $75. It just raised its annual dividend rate by 11.7%, from $0.60 a share to $0.67. The new rate yields 1.5%.
We are adding Wal-Mart to the Consumer Goods & Services section of our WSSF Conservative Growth Portfolio. It’s a buy for long-term gains.
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