This article was published by The McAlvany Intelligence Advisor on Friday, October 16, 2015:
Exterior of a Wal-Mart Supercenter in Madison Heights, Virginia.
Walmart (WMT) hit 90 in early January, and hasn’t come close since. On Tuesday this week it traded at 67, just before the company’s announcement that shook the markets. Following that announcement the stock traded at 60, down 10 percent on the day and 30 percent from January.
Pundits leaped on the news, claiming that it is a harbinger for the economy as a whole. After all, Walmart is the largest retailer in the world, with 4,600 stores in the US (11,500 worldwide) and 2.2 million employees. Its revenues are approaching half a trillion dollars annually. And so Wednesday’s announcement that its profits would decline between 6 and 12 percent next year led many to believe that, as goes Walmart, so goes the economy.
Adding substance to that assumption were three reports: the Philly report, the Beige book, and the Empire State Index, each of them shedding unhappy light on various parts of the economy. Manufacturing is slowing, consumers aren’t spending (except on new cars), and there’s the faint whiff of “malaise” in the air. Putting two and two together, those pundits pontificated about Walmart as another leading indicator in a potentially declining economy.
Except that they would be wrong. Walmart is not reacting to bad news, nor even reflecting bad news. It is adapting and, like an ocean liner, it’s going to take some time to modify its course.
First, it is slowing its planned construction of its Supercenters while ramping up its construction of its smaller Neighborhood Markets. It’s investing heavily in its e-commerce facilities as a way to leverage its advantage over Amazon: faster deliveries. As Walmart CEO Doug McMillon asked, rhetorically:
Here is a key question: will it be easier for an e-commerce company [i.e., Amazon] to build out a massive store network and create a customer-service culture at scale, or are we better able to offer digital and supply-chain capabilities and leverage our existing stores?
Many of Walmart’s 4,600 U. S. stores were receiving an unacceptably low rating for friendliness, efficiency, and product availability. At its low point, just one out of six were rated acceptable, getting a passing grade. Recently, efforts have brought those getting a passing grade up to two out of three.
But even that isn’t good enough for upper management. Said Greg Foran, Walmart’s head of its U.S. business: “That is really only getting us to, at best, mediocrity. So that bar is now being moved up….”
The biggest change in direction, however, will surprise many: Walmart is going upscale. Its decades-long unique selling proposition has always been low prices. But the company has not only squeezed about everything it can from its suppliers – euphemistically called “supply chain management” – so have its competitors. So the company is going after middle- and upper-income families by expanding offerings, replacing others, and fixing up the place. As Doug McMillon, Walmart’s CEO, expressed it: “You clean up your house before you invite people over.” Globally, he added: “We know [our] growth will disproportionally come from middle- and upper-income households in the years ahead.”
It’s going to take a while to turn this ship around, and the changes won’t be obvious, but gradual. But by 2019, according to top management, profits will once again resume their usual expected trajectory: 5 to 10 percent gains every year from then on out. At which time, it’s likely that WMT will be back to where it was earlier this year, or higher.
Walmart is indeed a harbinger – but one of an improving economy, not a declining one.
Disclaimer: The author is a former (emphasis added) registered investment advisor and is no longer registered or giving investment advice. He also has no position in WMT. At least at the moment.
Sources:
Wall Street Journal: Wal-Mart Surprises Market With Dim Outlook
New York Times: Market Drops on Weak Results From Walmart and Big Banks
Reuters: Wal-Mart warns on profit, stock has steepest decline in 25 years
MarketWatch: Dow industrials posts first back-to-back drop in October as Wal-Mart weighs
One year stock price chart on WMT
MarketWatch: Empire State factory gauge remains negative for third month in October
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