What Wal-Mart is Really Telling Us 3 / 5 / 2009

From CNBC -"Wal-Mart, the world's largest retailer, posted a better-than-expected 5.1 percent increase in sales at stores open at least one year, sending its shares up 3 percent in premarket trading. "We believe falling gas prices significantly boosted household disposable income in February and therefore allowed for both more trips and more spending toward discretionary categories," Wal-Mart Vice Chairman Eduardo Castro-Wright said."

Still from CNBC - "U.S. consumers have suffered in the past year from job losses, tighter credit and a weak housing market -- factors that have forced them to conserve money by shopping at discount stores and sticking to basic purchases like food."

Ever been to Wal-Mart? I'll take a wild guess and say that you have. It's at least 20 minutes further away than is your local super market. And US Consumers have decided that the deals there are worth the trip.

This, contrary to Wal-Mart and some Wall Street statements, does not suggest that the Consumer is stronger than we thought. It means quite the opposite. The Consumer is trying to maintain its life style by shopping at the king of discount stores. This result to me is identical to the recent report from Pep Boys - better than expected sales - It says that Consumers are still pulling in the spending reins. Wal-Mart and Pep Boys are lagging indicators.

Do not be fooled by Wal-Mart's positive reports. When they report declining Sales or lower than expected earnings that is when we will know the economy has finally begun to recover. That will be the proof. Wal-Mart's price / earnings is 14.0x (pep boys still shows negative earnings so a P/E ratio is "Not Applicable") . That means investors are willing to value Wal-Mart at 14 years worth of current earnings. Does that seem like a great value to you? No, this is speculation in its most obvious and purest forms.

Now, I am not here to build a case against Wal-Mart. If you are a business owner then you know that Wal-Mart is hard at work building market share in products that can grow store revenues in any market environment. Remember their shift last year to Personal Electronics, a good economy indicator. There are many more.

Wal-Mart's only risk is becoming lazy in their efforts to serve their customers. Study Wal-Mart and you will see a business model which is very similar to the US auto makers. Demand better and better parts, from fewer and fewer sources, at better and better margins. Eventually this model crushes the manufacturers of your products and reduces the overall quality offered your customers.

But that scenario is at least a decade away for Wal-Mart. They are still looking at ways to build value over time, incrementally. When they start pushing Wal-Mart credit cards at their customers, that is when we should begin to think Wal-Mart's retail efforts have reached their peak.

Build Value - like Wal-Mart - Everyday.

Brad van Siclen