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Wal-Mart's stock shows signs of life
The big retailer is going after the Target demographic, and Wal-Mart's latest earnings report shows that effort is starting to pay off.
By Robert Walberg
Its ironic that, on Wall Street -- where billion-dollar deals are commonplace -- a couple of cents one way or the other can dictate the fate of a stock.
Just look at the differences between Wal-Mart Stores (WMT, news, msgs) and Target (TGT, news, msgs). Wal-Mart beat the Street's per-share earnings estimate by two cents when it reported first-quarter earnings of 63 cents a share Tuesday. Target missed the Street estimate by one cent Monday. Wal-Marts stock was up 1.4% after it reported, while Targets sank 4.2%.
It is probably too soon to suggest that Wal-Mart has regained its footing relative to its smaller but faster-growing rival. But its a sign that Wal-Mart is no longer stumbling.
After steadily losing share to Target when it came to higher income consumers, Wal-Mart responded by changing its product mix to cater to that group. At the same time, Wal-Mart kept its prices low and competitive. The result: Sales were up 12%, to $79.6 billion.
Wal-Mart did disappoint investors with its guidance for the current quarter. Management, citing rising fuel and utility costs, issued tempered guidance for the coming quarter. It predicted second-quarter earnings of between 70 cents and 74 cents, while the Street was expecting 74 cents.
The company did maintain its full-year 2007 guidance of $2.88 to $2.95 per share. The consensus estimate is for a gain of $2.93. Clearly, management expects its efforts at reducing costs, controlling inventories and enhancing its product mix to result in a strong second half.
Targeting the affluent
Beyond the numbers, there are clear signs Wal-Mart is flexing its muscles again, working to turn the massive foot traffic into its stores into increased sales. Among its efforts: Updating the image of its apparel offerings, with new brands such as Metro 7; expanding its electronic department by adding popular brands such as Toshiba and Samsung; and offering more organic foods at lower prices than the competition.
Those steps should drive sales of more expensive items -- especially in more affluent areas where consumers tended to prefer Target.
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Wal-Mart continues to have image problems and remains vulnerable to headline risks. Over the last several years the company has fought against the perception that it discriminates against female workers; underpays and overworks its employees; hires underage workers to operate dangerous machinery and destroys small rural economies by forcing out mom-and-pop shops. Its ongoing war with the United Food and Commercial Workers union could always resurface to jolt the stock.
The companys anti-union stance made headlines the other day as Wal-Mart denied that it promised to unionize its Chinese operations. Nevertheless, management is aware of its image problems and is working to redefine how consumers view the company. It does that by trumpeting how many jobs Wal-Mart has created and by reminding consumers how much money it has saved them.
Combine these efforts with the improved product mix and the companys steadfast commitment to low prices and Wal-Mart should finally begin to regain favor on Wall Street. Despite Wal-Mart's solid track record and marketplace leadership, its stock currently trades at a discount to its peers, the market and its own historic valuations.
The stock is showing signs of renewed momentum and that should carry it to bigger gains over the next year. I think the stock could climb to $59, which would represent a gain of nearly 25%. Toss in a dividend yield of 1.4% and thats not a bad return for a big, stable company. Ill keep the stock in my Street Patrol portfolio.
At the time of publication, Robert Walberg did not own or control shares of companies mentioned in this column.
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