Walmart (WMT) should have “encouraged” Chief Executive Mike Duke to retire months ago.
Under Duke’s five-year tenure, WMT stock has gained roughly 52%, underperforming both the S&P 500 and WMT nemesis Target (TGT) — both of which more than doubled during that same time period. The family of the late Walmart founder Sam Walton, which still controls the retailer, was probably hoping that a change in management would lead to a change change their financial fortunes as well.
It’s hard to say whether Duke’s successor, Doug McMillon, the head of Walmart’s International business, is the answer to what ails the retailer. McMillon started with Walmart in 1984 as a summer seasonal worker and managed to grow the company’s international business at a faster rate than its U.S. operations. During the most recent quarter, international sales jumped 4.1% excluding the effect of currency. U.S. sales gained 2.4% during the same time.
For now, investors should stay on the sidelines when it comes to WMT stock because it isn’t clear that McMillon is going to make the changes that the company needs to make. McMillon will be the fourth Walmart insider to lead the retailer since Sam Walton stepped down in 1988.
Walmart investors would have probably preferred that the retailer consider outsiders. The company’s “best thinking” got it into its current predicament, and more of the same won’t help WMT stock regain its competitive footing.
Wall Street cheered the news of Duke’s departure, sending WMT stock up slightly. Investors have been searching for anything that looks like good news at a time when not much has gone right for the world’s largest retailer. Many economists are predicting that holiday sales will be the worst in years, as consumers worried about their fiscal futures keep a tight grip on their wallets.
Duke has repeatedly blamed recent problems on the consumer, and to a certain extent he is right. Stubbornly high unemployment, stagnant wage growth and cuts in government entitlements have dampened the holiday spirit for many Americans. But there is more to the WMT stock woes. Target and other competitors seem to be holding up better, despite dealing with the same macroeconomic issues.
Same-store sales have slumped for the past three quarters at Walmart’s U.S. stores, and are down 0.3% through Oct. 25. But its competitors are doing much better. Target saw a 0.9% gain in comp sales during the third quarter. Family Dollar (FDO) reported flat same-store sales in its latest quarter, but expects them to gain in the “low single digits” in the current fiscal year. Off-price retailer TJX (TJX), parent of TJ Maxx, reported 5% comp sales growth in its latest quarter and has forecast gains of 1% to 2% during the current time period.
One of the reasons why WMT stock isn’t measuring up to its competitors during these tough times is customer service, which seems to be non-existent at many locations. Complaints have been widespread, making this exactly the kind of situation that Duke should have rectified. Data from the American Customer Service Index shows that Walmart ranked dead last among retailers from 2007-12. Even worse, it has ranked at the bottom among supermarkets as well. That’s bad news since groceries are an increasingly important market for the company.
One reason for the subpar service is that Walmart doesn’t have enough employees at its stores to keep it shelves stocked, a situation the company is trying to rectify by hiring additional staff. So it’s hardly surprising that consumers have been complaining about the freshness of fruits and vegetables. The company is trying to address the fresh food complaints through its TV commercials, but in the end, Walmart has no one but itself to blame for its staffing woes.
Some of Walmart’s problems exist outside of poor store management. Duke created a corporate culture where allegations of bribery at the company’s Mexico operations were ignored, despite evidence that the allegations were true. The New York Times noted that top Walmart managers shut down an internal investigation, prompting the company to begin a new internal review, which has cost the company $230 million. Again, the question comes back to Duke. What did he know about what was going on in Mexico and what did he do about it?
But given that the bribery allegations involved Walmart’s international business, McMillion is also under scrutiny. It remains unclear whether McMillon was involved in quashing an investigation into the Mexico bribery allegations that have embarrassed the company. And investors are left wondering how he handled similar issues in other countries.
WMT stock faces some huge challenges heading into the all-important holiday season. The company’s maniacal focus on keeping prices low served the company well when times were tough. As the economy continues to rebound, consumers’ attention shifts to service and selection.
If McMillon can’t figure how to give the people what they want, they will continue to shop elsewhere, leaving WMT stock on the shelves.
As of this writing, Jonathan Berr did not hold a position in the aforementioned stocks.