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Now on sale: Wal-Mart's stock
The retailing giant's shares fell once again after a weak forecast overshadowed a solid fourth quarter. But with Wal-Mart finally making the right moves, the stock is set to climb.
By Robert Walberg
For the past two years, it seems like the home of everyday low prices has watched its share price go lower every day.
And it didn't get any better Tuesday for Wal-Mart Stores (WMT, news, msgs). The worlds largest retailer warned that its earnings for the rest of the year would fall short of Wall Street's expectations. Wal-Mart said full-year earnings would come in between $2.88 and $2.95 a share. The Street was expecting $2.98.
Unfortunately, the profit warnings overshadowed a relatively strong fourth quarter (which ended Jan. 31) that saw Wal-Mart grow year-over-year sales and earnings by 9.6% and 14.7%. Backing out a one-time tax gain of $103 million, Wal-Mart earned 84 cents a share, which beat the consensus projection by a penny.
That's pretty impressive for a company in transition. Even the forecast shouldnt be viewed too harshly, as it leaves Wal-Mart trading at about 15 times its projected earnings. Not cheap, but a reasonable price to pay for a piece of a retailing giant on the mend.
Less warehouse, more fashion
What makes the stock even more appealing near current levels is that the recent string of setbacks has forced management to take a harder look at its business. The result is a refocused, rejuvenated management team, committed to revitalizing the Wal-Mart brand and enhancing shareholder value.
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You could argue that it took management too long to respond to consumer and worker complaints. But big companies, like big aircraft carriers, tend to turn around slowly. To managements credit, Wal-Mart has been working feverishly over the past several months to remake its public image in an effort to better compete with competition from the likes of Target (TGT, news, msgs) and Costco Wholesale (COST, news, msgs).
As for the store image, CEO Lee Scott said on the conference call, our entire management team is dedicated to growing sales by making our stores more relevant to today's customers." To achieve that goal, the company will bolster capital spending in fiscal year 2007 by 15%, and remodel 1,800 stores over the next 18 months.
For years, Ive complained (as have others) that Wal-Mart, with its merchandise stacked high and its aisles filled with clutter, wasnt nearly as shopper-friendly as Target. Wal-Marts internal clothing lines also left a lot to be desired, especially compared to Kohls (KSS, news, msgs) and to a lesser extent Target.
Wal-Mart is finally heeding the message. Remodeled stores will have less of a warehouse feel and more appealing selections. The company will unveil its fashion-forward, Metro 7 line for women in roughly 1,500 stores by September. Such steps dont guarantee future success, but they prove that management isnt content with growing sales and earnings by 9% to 12%, and thats a big statement for a company of this size and stature.
A smart PR offensive
Wal-Mart also continues to spend money on remaking its public image in the wake of worker, supplier and neighborhood complaints. Unfortunately, its much easier to change the product mix than it is to change public perception. Wal-Mart is seen by many consumers, especially those in smaller towns, as the evil empire that forces out small, family-owned local businesses.
But Wal-Mart, which employs about 1.6 million people, is now actively bringing its message to the public. To have any chance to win this battle, the company will need to be proactive in pushing its public-relations message for years to come. There is a high cost associated with such a campaign, but management finally understands that doing nothing -- and thereby losing customers to the competition -- costs even more.
As a long-term investor, you can excuse Wal-Marts earnings warning as largely irrelevant. The effects of managements turnaround efforts wont be fully felt by the end of this year, let alone the end of the first quarter. Wal-Mart is a long-term story, and what is relevant is that at todays price you get to buy the biggest, most successful retailer in the world at a discount. Such opportunities dont occur often. When they do, I say its time to buy.
Ill add Wal-Mart to my Street Patrol portfolio as of Wednesdays close.
At the time of publication, Robert Walberg did not own or control shares of any companies mentioned in this column.
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