If you were asked to compile a list of the greatest capitalists of all time, one name would have to be up there among the top: Sam Walton, the incredible business genius responsible for creating the world’s largest and most successful retailer, Wal-Mart (NYSE:WMT). Founded in 1962 as a modest mom-and-pop retail store in a small Arkansas town, Walton managed to make his store essentially synonymous with discount retailing.
During the 1990s, Wal-Mart shares were an investor’s godsend. The stock soared more than tenfold during the decade, making it one of the best performing large-cap retailers in history. However, since the beginning of this century, the stock has slowly plodded its way to virtually dead money status.
Now, investors are wondering if the iconic retailer’s stock is destined for another dead money decade, or whether it will return to its former glory and deliver market-beating gains again. Let’s weigh the latest pros and cons:
In good company. Despite the lack of performance of Wal-Mart shares over the past 10 years, the stock is still a favorite holding among the world’s greatest investors. It’s right near the top in billionaire investor Warren Buffett’s portfolio, where some 39 million shares sit. The stock also is a big holding in investor George Soros’ portfolio. That puts you in good company when you own this stock.
Strong international sales. The retailer just posted an overall 2.5% increase in sales, along with a 27% surge in profit for its fiscal fourth quarter ended Jan. 31. Key to the year-over-year overall increase was its booming international operations. The company’s tquarterly sales rose to $115.6 billion from $112.8 billion a year earlier, thanks to major sales increases Brazil, Mexico, and of course, China.
Back to basics. Although overall sales were better in the most recent quarter, U.S. sales have faltered. The company’s executives know this, and that’s why they’ve embarked on a new back-to-basics approach in an effort to recapture lost U.S. market share. Wal-Mart will concentrate on its “everyday low prices” theme, which should gain some traction now that everyday expenditures such as fuel prices and food prices are higher.
Weak domestic performance. The aforementioned fourth quarter saw a disturbing continuation of an unpleasant trend. The company reported a seventh straight quarterly decline in comparable-store sales at its key U.S. locations. And though international sales were stronger, the company gets nearly three-quarters of its operating profit from U.S. operations. Unless this metric reverses direction, WMT shares will have a tough slog going forward.
Competition from deep discounters. Wal-Mart offers low prices, but not as low as some of the really deep discounters like Dollar Tree (NASDAQ:DLTR) or Family Dollar (NYSE:FDO). Unlike Wal-Mart’s recent domestic numbers, Dollar Tree just posted fourth-quarter earnings that jumped 20% on rising sales and widening margins. Both of these deep discounters have experienced strong growth as cost-conscious consumers continue to bargain hunting, and that trend has taken a bite out of Wal-Mart.
A recognized laggard. Perhaps the biggest con facing Wal-Mart shares is Wall Street’s recognition that the stock is a plodding laggard. Over the past five years, the stock is up a very solid 18%. However, that performance is much lower than the broadline retailer group, which posted gains of nearly 25% over said period. More recently, WMT shares actually are down over the past 12 months, while the broadline retailer group is up nearly 14%.
Although Wal-Mart is unquestionably one of the greatest success stories in the history of capitalism, its recent share price performance has failed to reflect its stellar past. Until the company can prove that it can recapture some of its lost domestic market share, I have to reluctantly say that the verdict here is in favor of the cons.
At the time of publication, Jim Woods had no positions in any of the securities mentioned here.