Wal-Mart (WMT)

Yesterday morning Walmart (WMT) reported another solid quarter (WMT FY 3Q Earnings Release). This morning The Wall Street Journal ran a front page article on them: “Walmart Flourishes As Economy Turns Sour” (subscription required).

While other retailers were reporting horrid same store sales, Walmart’s actually increased 2.7% in the quarter, including 2.2% in October.

Wal-Mart Stores Inc (WMT) posted profits that beat Wall Street forecasts, and said it expects to outperform rivals as the global downturn forces shoppers to seek low prices, Reuters reported. Fueled by sales at its namesake U.S. discount stores, Wal-Mart has been outpacing competitors like Target Corp. (TGT) and Costco Wholesale Corp. (COST), as well as lower-priced department stores like J.C. Penney Company Inc. (JCP), in recent months as consumers stretch limited budgets by shopping its stores for necessities like food and medicine.

Since we’re probably heading for a multi-year, generational shift in consumer spending towards thrift this is shaping up to be quite a good stretch for Walmart.

Wal-Mart is excelling in a dismal operating environment. They are gaining customers from Target, buying back shares at decade low prices, plowing money into rapidly growing international operations and doing a much needed make-over on domestic ones. The results are showing up on the bottom line now for investors.

The wealth loss in the US is due to one thing, housing. People still have jobs as the unemployment rate is low and wages are actually rising. It is the value of their homes, their largest expense, and the fear that illicits are creating the current environment.

Now, since housing prices have fallen at the fastest rate in almost 100 years, this wealth deficit has been dramatic. It also means that a recovery to pre-bubble levels will take years, maybe decades. People who bought homes in the last 3 years have a negative equity or, now not enough to tap for loans. Sensing this, they will spend accordingly.

If this is the reason people are running to Wal-Mart rather than the other retailers, one can only assume this trend will be in effect for the foreseeable future.

For shareholders of Wal-Mart, that is indeed good news. For holders of Target (TGT), JC Penny (JCP) and others, it means rapidly shrinking margins and the necessity to redefine themselves^[1]. Whenever you have a company improving results in an environment that sees its competition and industry faltering, it is a good idea to take a really close look.

1. ↑ ValuePlays Research

FT.com -- Wal-Mart, the world’s largest retailer, beat expectations after its US discount stores accounted for about 50% of all US retail growth during 2008 – while its full-year global sales passed $400 billion for the first time, and profits hit $13.4 billion.

Wal-Mart's strong international performance (at stores in Argentina, Brazil, Canada, China, Costa Rica, El Salvador, Guatemala, Honduras, Japan, Mexico, Nicaragua, Puerto Rico and the United Kingdom), with a 5-week sales increase of almost 19% (see bottom chart), which might suggest that the economic slowdown in the U.S. has not spread internationally, and also suggests that U.S. companies can remain profitable from strong international sales despite a domestic slowdown.

“We are pleased with the overall performance of our International markets,” said Mike Duke, vice chairman responsible for Wal-Mart International. “We had strong sales performance in key countries, including the United Kingdom, Canada, Brazil and China.”

Wal-Mart announced July 10th, that June sales rose more than analysts’ estimates as shoppers facing soaring gasoline and food costs used $86.1 billion in tax rebate cheques to buy discounted clothing and grocery items. The retailer had said previously it was unsure if it would receive a sales boost from the rebates, but then in May, Wal-Mart reported higher than expected sales. Same store sales climbed 6.1%, faster than earlier predictions of as much as 4%.

The retailer said that profit for the July quarter would increase to $0.82-0.84 a share, higher than a May projection of $0.78-0.81.

Wal-Mart will use its large size to push its way further into the consumer electronics market and take away market share and revenue from Best Buy. Discount retailers and wholesale clubs continue to pull market share from the established electronics leaders like Best Buy. Yet another example of the retail spending transformation we've been seeing in ChangeWave surveys all year.

Although Best Buy (BBY) (40%) remains the number one store respondents say they'll shop at over the next 90 days for home entertainment and networking products, it's showing a 3-pt decline from a year ago (Aug 2007).

Going forward, the stores with the most momentum in electronics are Costco (COST) (26%; up 5-pts Year-Over-Year), Amazon (AMZN) (20%; up 5-pts YOY), Wal-Mart (WMT) (17%; up 6-pts YOY) and Sam's Club (10%; up 3-pts YOY).

New processes for evaluating square footage expansion will diminish the effect of cannibalization and improve returns on capital expenditure.

Wal-Mart's plunge into international markets has proven to be quite successful. Since the company opened its first non-U.S. location in Mexico in 1991, international sales have grown to account for around 22% of total revenues. While the majority of sales still come from within the U.S., this could change pretty soon if current trends continue. For FY2007, domestic Wal-Mart and Sam's Club stores reported increased sales of 7.8% and 4.5%, respectively. During the same time period, international Wal-Mart locations increased revenues by 30.2%. Judging from Wal-Mart's plan to increase international square footage by 10% in calendar year 2007, it's realized that international markets (especially emerging economies) are the place to be for high growth potential. Given the size of the untapped markets available to Wal-Mart beyond the U.S. borders, as well as the risk of cannibalizing current stores if it grows too much more domestically, the chain has every incentive to continue outward expansion, which it seems poised to do.

This time Wal-Mart reported that the International Segment operating profits have risen from 21% to 23% of the company's total. They grew at 11.8% for the year and 14% for Q4. At this pace, Wal-Mart will be 50/50 domestic and international profits in 6 to 8 years.

Walmart learned to run the stores with a less of a quarter of the regular task forces. Example: 1 department manager every 2 or 3 departments. That it profit.

Wal-Mart Stores Inc has expanded its laptop selection by 40 percent and will be aggressive in pricing the computers and the accessories. WMT aimes to win sales from frugal back-to-school shoppers.

WMT is looking at the back-to-school season as a chance to showcase its expanded selection of notebook and netbook computers, with Severson saying laptops are becoming a staple item for students of all ages.

The economic downturn has taken a toll on Wal-Mart's top competitors Target (TGT) and K-Mart (SHLD). Not only are Wal-Mart's annual revenues more than 5 times the revenues of the two competitors combined, but Wal-Mart is also seeing positive comparable store sales growth. In FY2009 Wal-Mart comparable store sales went up 3.5% (up from 1.6% in 2008) whereas Target and K-Mart suffered declines of -2.9% and 6.1% respectively. As Wal-Mart continues to expand at home and abroad, its competitors are slowly beginning to slowly drift behind.

Wal-Mart is excellent at how they acquire products and eventually deliver them to the customer. They have tremendous buying power and possess an extremely efficient supply chain. Buying products at a low price from its suppliers and keeping expenses for those products that eventually reach the consumer minimal, Wal-Mart is bound to keep increasing their profits. The economy is hurting and consumers know that Wal-Mart consistently offers low prices at thousands of different locations. Look for Wal-Mart to continue to prosper as they become more familiar with the global market as well. The global economy has only seen a glimpse of what is to come. Wal-Mart is a buy for right now and especially for the long-term.

Wal-mart is the "last ship standing" in a bad economy because of its low price points. A slowing economy isn't good for Wal-Mart, but Wal-mart is hurt less than other retailers - as evidenced by walmart's fall `08 sales growth - only single digit growth, yes, but this is at a time when higher-end retailers saw double digit declines. When times are tight, families don't cancel Christmas - but they do look for ways to cut costs. So, Wal-Mart is effectively stealing market share from competitors in a slowing economy.

Wal-Mart is the world's largest nongovernment employer, because it's the world's most popular retailer. A mind-boggling more than 100 million Americans shop there every week. Wal-Mart's combination of rock-bottom prices, quality and convenience -- it offers a dizzying array of household staples under one roof -- appeals strongly to shoppers who need to stretch their dollars. Estimates of the average family's annual savings from shopping at Wal-Mart range from $900 to $2,300, depending on the study you consult.

Interestingly, the folks who hate Wal-Mart are often the sort who usually make a big deal about how much they care for low-income people. They make a mistake when they turn a blind eye on the achievements of this powerhouse for the poor.