Wal-Mart's Two-Day Surge
Growth and value investors alike have long insisted that shares of Wal-Mart weren't getting enough respect. After a 4% gain on June 1 and another 3.5% advance on June 4, Wal-Mart is now up to $51.21, its highest price since a one-day ride to $52 last October. Wal-Mart's 2007 return is now above 10%, slightly ahead of the Dow Jones industrial average's rise so far this year. Over the past five years, however, Wal-Mart shares are still underwater.
The same analysts who never quite understand how Wal-Mart shares (symbol WMT) could have been so awful over the bull market and economic expansion of the past five years find it easy to explain these two rare days of bliss. The apparent explanation for the rally is this: On June 1, Wal-Mart's chiefs held the annual shareholder meeting before a huge crowd at the University of Arkansas and announced they would spend less money on new Supercenters and billions more repurchasing stock in the open market.
But this explanation isn't entirely logical. Since there's already a Supercenter on every highway retail strip in the nation (except in California, where Wal-Mart's presence often breeds protests and lawsuits), slowing expansion plans would seem, on the surface, to be neutral for the retailer's revenues. But sales of groceries -- the feature that makes a regular Wal-Mart a Supercenter -- are much stronger than just about any other area of merchandise. So Wal-Mart is voluntarily putting a brake on the expansion of part of its business that's working well while continuing to struggle with clothes, electronics, housewares and furniture.
The company begs investors to believe that weather and high gasoline prices are special problems not shared by other kinds of retailers. That is questionable. Gas was less than $2 a gallon in some states five months ago, yet Wal-Mart's wintertime sales were also generally unimpressive.
As it turns out, Wal-Mart executives have previously talked about slowing spending on store construction by limiting the growth of capital expenditures to less than the rate of sales increases. Wal-Mart also has pledged to hold inventory growth to no more than half of sales growth. So the revelation that Wal-Mart is now embracing some kind of financial "discipline" isn't breaking news. But when you say it at an extravaganza like a loud shareholder's meeting in a basketball arena, the message travels better than it does when transmitted on a quarterly earnings call.
That said, is Wal-Mart meeting these targets? Over the 12-month period that ended April 30, inventories were up 10.3% and sales 8.3%. So that's a miss. Capital spending for property and equipment, foreign and domestic, rose 16.5%. That's twice, not half, of that 8.3% one-year sales gain. So, again, there's plenty to wait and see about. These numbers are arbitrary inside-the-company goals, but once bosses tell the investment community they've set some tough standards for themselves, the proof is in the performance.
Despite several analyst upgrades that Wal-Mart received on June 4, there's little reason to think that the stock is off to the races. The company still suffers from poor sales trends, flat profit margins, an unimpressive return on shareholders' equity, troubles in foreign countries (though that is improving) and the assorted political, labor, and public-relations issues that have probably contributed to its share price being lower than it ought to be.
One new thing Wal-Mart is doing: undertaking a big energy-savings drive. This green initiative might pad the profit totals, because Wal-Mart has big stores to heat and cool and a huge trucking and warehousing infrastructure. It might also get some socially motivated mutual funds to declare Wal-Mart rehabilitated and lift some of the political clouds over a company that is more controversial than most.
Wal-Mart shares trade for 15 times the average analysts' earnings estimate for the fiscal year that ends in January 2008. That's comparable to Best Buy, a little less than Target, and considerably less than Costco. Wal-Mart's surge shows that someone will buy this stock if there's a reason. But stronger sales momentum would be a better reason.