Wal-Mart Stores (WMT)

Wal-Mart faces considerable legal and media pressure from unions, activists, and lawsuits, which may damage its reputation and affect its ability to expand.

Wal-marts stock will not experience the growth it has in the past because of its inability to replicate its business model in foreign markets. As the company has already conquered the US and has no more room to grow in that market, it will need to spend a significant amount of time and money trying to figure out what works and doesn’t work overseas. Wal-marts business model, which has had remarkable success in the US, isn’t doing well in many foreign markets. In recent years Wal-mart has pulled out of Germany and South Korea after several unsuccessful years in those countries. While it has been relatively successful in Mexico, China and Britain it continues to struggle in Japan. Wal-mart has spent more than $1 billion in Japan but still can’t manage to get a hold on the Japanese retail market. Wal-marts future growth will be dependent on its ability to develop unique strategies that adapt to the norms of individual countries rather than implementing its US based business model over and over again.

Reliance on a low-income customer base will cause problems as health care and energy costs rise, and Wal-Mart has demonstrated problems with attracting higher-income consumers.

Recent new initiatives, such as remodels and fashion apparel, have damaged same store sales, rather than improved them.

While low-income shoppers are plentiful and have been the backbone of Wal-Mart's customer base for some time, they can be a bit fickle. The households that shop at Wal-Mart are more sensitive to energy prices, changes in the housing market, inflation, interest rates, and pretty much anything else that can reduce a person's disposable income, than the average American. This can obviously impact Wal-Mart, since so many of its customers make less than the national average. With crude oil selling at as high as $75 per barrell (over 50% higher than in January, 2007), energy costs could be taking an increasingly large chunk out the wallets of Wal-Mart's primary customers. Realizing this, Wal-Mart's been trying to tap into new customer demographics for the past year or so. It's introduced higher-end fashions to its stores, upped its offering of organic foods, and tried to pump life into the sluggish home decor segment. None of these moves on Wal-Mart's part, however, have worked very well. Higher-income customers are not as inclined to spend their money at Wal-Mart, where low prices are always number one. The low-price emphasis is all fine and well for Wal-Mart's existing customers, but the company's drilled this message home so well that it's having trouble attracting new, quality-conscious customers. This hasn't seemed to sink in at Wal-Mart just yet; as CEO Lee Scott recently said, "I don't think any customer has a problem buying a white blouse from Wal-Mart."

Signs of an economic recession abound after the subprime lending fall-out, and Wal-Mart, as the nation's top retailer, will suffer. Investors seem to disagree - evidenced by Wal-Mart's still-rising stock price - because they think that Wal-Mart's lower prices will attract more consumers as their spending power declines. But what's really going to happen is consumers are going to spend less, overall. They might keep going to Wal-Mart for groceries, but they'll stop buying DVDs, and furniture, and toys, and all of the other non-necessities that Wal-Mart offers. Ultimately a lack of discretionary income will hurt all retailers. Wal-Mart will not be immune.