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Can Wal-Mart's PR campaign save its stock?
If you've held the stock for five years, you've lost money. But Wal-Mart plans to aggressively battle to restore its reputation.
By Robert Walberg
The name Wal-Mart generates more raw emotion these days than most companies. People either love the company for its prices, service and selection, or they loathe it for squeezing the small-town mom-and-pop shops out of business. Yet few would argue that the company has not been an enormous financial success. From 1980 to 1996, Wal-Mart's sales jumped from $1 billion a year to more than $100 billion. During this amazing growth, the stock soared by more than 8,000%, turning many shareholders into millionaires.
Wal-Mart Stores (WMT, news, msgs) has kept the double-digit growth coming, despite its now-giant size. Over the last five years, sales have grown from $181 billion to $285 billion, with net income surging from $6.2 billion to $10.3 billion. Unfortunately, investors who waited until 2001 to buy into Wal-Mart's success story have enjoyed little to no success.
Sales may still be climbing something more than 11% per year, but the stock has gone flat. In fact, an investor who bought Wal-Mart shares on the first day of trading in 2001 and held them through April 11 has seen the investment decline by 9.9%. The Standard & Poor's 500 Index ($INX)has dropped by 7.95% over the same period.
It gets worse: Over the same period, competitors Costco Wholesale (COST, news, msgs), Target (TGT, news, msgs) and J.C. Penney (JCP, news, msgs) saw their stock prices climb by 12.4%, 49.6% and 367.3%, respectively.
Typically, when a stock underperforms for such a prolonged period of time, investors start to get restless. CEOs come under fire; some even lose their jobs.
Doing its job
Then again, it's tough to fault management for growing a company sporting a market capitalization of $203 billion at a double-digit pace. The stock's return on equity, return on assets, free cash flow and dividend yield are the best in its group as well. In other words, Wal-Mart's top brass seem to be doing their job of growing the business and managing the finances.
So why aren't investors rewarding the company for its performance? It's not a question of valuation. Wal-Mart trades at a modest discount to its peers based on estimated earnings for the current and following fiscal years. Its trailing 12-month price-to-sales ratio of 0.71 is also below the industry average.
One explanation for the stock's lackluster performance over the past five years is that the competition was getting tougher and the growth prospects smaller. Despite the company's amazing growth, investors haven't been as excited about owning a business growing at 11% to 13% a year, instead of the 20% or more they had come to expect.
Related Wal-Mart news and commentary
Wal-Mart had gone from owning the small-market towns across America to invading many major metropolitan areas as well. As of March 31, the company had 1,343 Wal-Mart stores, 1,730 "supercenters," 552 Sam's Clubs and 86 Neighborhood Markets in the United States.
New concepts and international markets remain open, but investors question -- and rightly so -- how the company will duplicate its early success.
High expectations
Meanwhile, the Sam's Club stores continue to struggle against tough competition from the likes of Costco and BJ's Wholesale Club (BJ, news, msgs). The unit's growth rate, while decent, never quite lived up to the expectations set by the regular Wal-Mart stores.
And then there's the backlash from the stories on how Wal-Mart has treated some of its employees (underaged workers allegedly operating dangerous machinery, female employees claiming discrimination, etc), as well as its legendary hard-line stance with suppliers. The growing war with the United Food and Commercial Workers union isn't helping matters on the publicity front either.
Wal-Mart is a non-union company and is fighting hard to remain so, though the unions contend that the only reason the company can offer such low prices is that it underpays its workers and offers them substandard benefits. Wal-Mart, which employs more than 1 million workers, vehemently denies these claims and is launching an ad campaign promoting its low-priced model as good for America.
Wal-Mart's management finally understands that they need to put a different face on the company for the public, as well as for the investment community. The company needs to promote its incredible growth, the jobs it creates in towns large and small, the total number of people it employs and the value it continues to bring to customers. In solving its identity crisis, the company might just solve its stock crisis.
Public relations alone won't appease investor concerns about future growth prospects and the risk of a higher cost structure, but it could go a long way toward eliminating the negative sentiment surrounding the company and, by association, its stock. With that accomplished, management could then keep doing what it's been doing operationally for the past several decades, growing the business at a rate superior to the rest of its peers. That would help the stock emerge from its slumber.
Ready for a fight
We've all heard the clich, let a sleeping dog lie. Well, this dog has been kicked, and it's now awake and fighting back. That's bad news for the competition but good news for shareholders.
The fight is just beginning, so don't look for miracles overnight. Wal-Mart's fiscal first-quarter sales aren't expected to be great, and the stock continues to exhibit poor relative strength. But its discounted valuations should help limit the downside risk to nearby support at $45.
And for the patient investor, snapping up the stock now will rival the bargains you'll find inside the store because there's just no way that a company performing at such a high level will continue to trade at a discount to its peers and the market.
If management puts as much effort into winning the public relations battle as it does in winning the price battle, don't be surprised if Wal-Mart's stock -- currently under $50 -- is back in the $58-to-$60 neighborhood within the next 12 to 18 months, with additional gains to follow.
At the time of publication, Robert Walberg neither owned nor controlled shares in any equities mentioned in this column.
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