WAL-MART STORES INC. $57 (New York symbol WMT; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 3.9 billion; Market cap: $222.3 billion; WSSF Rating: Above average) is the world’s largest retailer with over 7,400 stores in the United States and 13 other countries. It serves over 175 million customers each week. The company has three main divisions: the Wal-Mart division operates 3,630 discount stores in the U.S. (63% of total sales); the Sam’s Club division operates 595 warehouse club stores (25% of sales); and the International division consists of 3,200 stores outside of the U.S. that Wal-Mart operates directly and through joint ventures (12% of sales). Revenues grew from $256.3 billion in 2004 to $374.5 billion in 2008 (fiscal years end January 31). Earnings rose from $2.03 a share ($8.9 billion) in 2004 to $3.16 a share ($12.9 billion) in 2008. In its third fiscal quarter ended October 31, 2008, earnings rose 6.6% to $3.0 billion from $2.8 billion a year earlier. The company repurchased $3.5 billion worth of its common shares in the latest quarter. Thanks to fewer shares outstanding, earnings per share grew 10.0%, to $0.77 from $0.70. Overall sales rose 7.4%, to $98.6 billion from $91.9 billion. Sales rose 6.1% at the U.S. stores, 11.2% at the international division and 7.4% at Sam’s Club. In the latest quarter, same-store sales at its U.S. operations rose 3.0% (2.7% at Wal-Mart stores and 4.5% at Sam’s Club). That’s double the 1.5% rise in same-store sales in the year-earlier quarter. The company’s long-term debt of $34.1 billion is a reasonable 16% of its market cap. It also holds $5.9 billion or about $1.50 a share in cash. Wal-Mart pays a $0.2375 quarterly dividend, which currently yields 1.7% on an annualized basis.
Aggressive focus on low prices
The main reason behind Wal-Mart’s success is its focus on low prices. The company’s large size lets it buy merchandise in bulk from suppliers at substantial discounts. Wal-Mart also uses computerized inventory systems to quickly identify and track customer purchasing patterns. This information helps the company avoid shortages of popular items, which helps sales and customer satisfaction. The company has had trouble expanding in parts of the U.S. in the past few years, particularly urban areas. That’s mainly due to opposition from activist groups who fear the impact a new Wal-Mart store would have on local businesses. Consequently, many of its new stores cannibalize sales from its existing stores. Wal-Mart recently shifted its strategy from simply increasing square footage, to maximizing the profitability of new stores. It now plans to spend 13% less on new stores and renovations in fiscal 2009. In the U.S., Wal-Mart plans to open 212 stores this year compared to 243 in the prior year. That figure includes 166 supercenters, which sell groceries as well as general merchandise. Supercenters are Wal- Mart’s most profitable store format, and now account for 20% of the U.S. grocery sales. The company will also upgrade many of its older stores, including widening aisles and installing better lighting. That should help spur customer traffic and improve efficiency.
Aims to hang on to new customers
The slowing economy and Wal-Mart’s low prices have helped it attract new customers who would might otherwise shop at more upscale stores. The company now aims to hang on to these new customers after the economy rebounds. One way is by improving the quality of the goods it carries. Shoppers tend to equate Wal-Mart with lower- quality goods, so stocking more higher-margin products such as flat-screen TV sets should lead to long-term gains. Other innovative services such as $4-a-month prescription drugs should also help encourage repeat visits. The company is also building up its international operations. Wal-Mart ran into trouble with its expansion in Germany and South Korea, and recently sold these money-losing businesses. But it has high hopes for new operations in Asia and Latin America, where increasing prosperity is making its products more affordable. In 2007, Wal-Mart paid $264 million for a 35% interest in BCL, which operates over 100 discount stores in China. It also formed a joint venture with Bharti Enterprises to provide wholesale distribution services in India. In addition, Wal-Mart paid $895 million to raise its stake in its Japanese subsidiary to 95%.
Higher U.S. dollar will hurt earnings
The recent volatility in the currency exchange markets and a higher U.S. dollar will hurt Wal-Mart’s short-term earnings, because overseas earnings now translate into fewer U.S. dollars. However, expanding internationally improves Wal-Mart’s long-term growth prospects. Wal-Mart’s earnings will probably rise to $3.45 a share in fiscal 2009, and the stock trades at 16.5 times that estimate. Wal-Mart is a buy.
