Wal-Mart Investors: You Can Do Better

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Wal-Mart (NYSE: WMT) is seeing mixed results domestically and abroad. Investors should look to other stocks with lower valuations and side-step these problems altogether.

Disappointment in China

Wal-Mart and Tesco are hard-pressed to lure customers to go to their stores in the People’s Republic of China and Singapore. This is a widespread issue with foreign stores operating in Greater China. For example, Carrefour is also closing stores in Singapore because of competition from domestic stores. These foreign retailers are hoping to attract customers by different promotional schemes based on cooking oil, soy sauce, and apples.

International retailers are facing various business challenges in the Chinese market as many shoppers do not intend to visit them.  Businesses are also facing challenges as China's economy has been hindered by slowing growth. Bloomberg Industries analyst Charles Allen said, “The rate of same-store sales increases is not what they were expecting it to be.” He further explained, “The rate of addition of capacity has probably exceeded the growth of the market.” As a result, Wal-Mart is very cautious to increase the number of its planned grocery stores in this country, where demand for groceries is 3.5 trillion Yuan ($560 billion) annually.

Growth in Mexico and Bribery Allegations

Sales of the largest retail store of Latin America, Wal-Mart de Mexico, gained 11% this quarter. Sales growth was attributed to extra promotional schemes attracting customers. Walmex (Wal-Mart in Mexico) secured 100.8 billion pesos ($7.9 billion) in revenues through these marketing activities.

Since August 2012, Walmex responded to price promotions from competitors like Controladora Comercial Mexicana and Organization Soriana with its own round price-cuts. Corp. Actinver analyst David Foulkes said, “The competition in the sector is more aggressive all the time.”

Walmex’s promotional strategy has not sacrificed profits. EBITDA has increased 15% to 9.43 billion pesos this year.

This retailer opened 49 more stores in this quarter, making its total number of stores opened this year 162. It is also planning to expand the capacity by 7.7% because of a favorable business environment. Management is also planning to start others sales schemes for food and cosmetic products to keep this sales growth for the next year. Walmex remains a leader in the Mexico’s retail market.

International growth may slow as the scandal of alleged bribery in Mexico and other foreign markets inspires government and internal crack-downs. In addition, flanking competitors leave little space for maneuvering or repositioning Wal-Mart’s value proposition.

Endless Wal-Mart Bad Press

Wal-Mart’s 11-year-old  gender discrimination lawsuit weaves in and out of the news. This is only one example of Wal-Mart’s terrible labor relations, a serious issue that puts a black mark on the company’s brand.

This gender discrimination lawsuit was first filed in 2001 by women from a few different Wal-Mart locations in the California area. They state that they were denied salary hikes and career growth because they are women. The workers’ lawyers convinced a judge that Wal-Mart's policies affected women at many of their stores all over the country, qualifying the case as a class action lawsuit. Wal-Mart appealed the class action certification, claiming that promotion and hiring decisions were made by local managers and were not a company-wide policy.

The discrimination lawsuit was started on behalf of Californian workers after the U.S. Supreme Court threw out a lawsuit representing employees of Wal-Mart across the nation. A U.S. Judge said that the plaintiffs have reduced the class size to between one and a few hundred thousand members. This reduced class might be certified if it can make a “showing consistent with the Supreme Court's decision.”

There is also a question of negative brand image. Wal-Mart is perceived as a rough employer and a cause of mass-extinction for small businesses. Regardless if this is true or false, good or bad, this is the perception many consumers have. Contrast this with Whole Foods Market, which can charge customers much more for what is essentially the same product. This consumer mindset latches on to confirming news of alleged bribery scandals and the negative environmental impact of Wal-Mart.

Comparing Valuations

Investors should be compensated for the many issues facing Wal-Mart in the form of low valuations. Consider the valuation metrics of Wal-Mart’s grocery, discount, and department store peers:

<table> <tbody> <tr> <td> <p><strong>Ticker</strong></p> </td> <td> <p><strong>Company</strong></p> </td> <td> <p><strong>Industry</strong></p> </td> <td> <p><strong>P/E</strong></p> </td> <td> <p><strong>P/S</strong></p> </td> <td> <p><strong>P/B</strong></p> </td> </tr> <tr> <td> <p>DDS</p> </td> <td> <p>Dillard's</p> </td> <td> <p>Department Stores</p> </td> <td> <p>7.82</p> </td> <td> <p>0.54</p> </td> <td> <p>1.75</p> </td> </tr> <tr> <td> <p>KSS</p> </td> <td> <p>Kohl's</p> </td> <td> <p>Department Stores</p> </td> <td> <p>12.14</p> </td> <td> <p>0.64</p> </td> <td> <p>1.95</p> </td> </tr> <tr> <td> <p>M</p> </td> <td> <p>Macy's</p> </td> <td> <p>Department Stores</p> </td> <td> <p>12.3</p> </td> <td> <p>0.58</p> </td> <td> <p>2.66</p> </td> </tr> <tr> <td> <p>SWY</p> </td> <td> <p>Safeway</p> </td> <td> <p>Grocery Stores</p> </td> <td> <p>8.53</p> </td> <td> <p>0.09</p> </td> <td> <p>1.39</p> </td> </tr> <tr> <td> <p>TGT</p> </td> <td> <p>Target</p> </td> <td> <p>Discount, Variety Stores</p> </td> <td> <p>14.38</p> </td> <td> <p>0.58</p> </td> <td> <p>2.58</p> </td> </tr> <tr> <td> <p>WMT</p> </td> <td> <p>Wal-Mart</p> </td> <td> <p>Discount, Variety Stores</p> </td> <td> <p>15.75</p> </td> <td> <p>0.55</p> </td> <td> <p>3.59</p> </td> </tr> </tbody> </table>

Each of these alternatives trades at lower price-to-earnings ratios than Wal-Mart. In particular, investors should favor Target at lower valuations without the tarnished brand image. Safeway and Dillard’s (NYSE: DDS) are also interesting alternatives to Wal-Mart with their considerably lower valuations. Choosing these Wal-Mart alternatives is a smart way to avoid this public relations nightmare altogether.

Many of these alternative firms could benefit from positive news of their own. For example, investors who buy shares of Safeway (NYSE: SWY) also stand to benefit from the spin-off of Safeway’s gift card business. Spinoffs generally benefit investors, as the parts of the original firm are usually valued more than the whole. Safeway announced that its gift card business, Blackhawk Network Holdings, is planned to IPO in the first half of 2013.

Dillard’s, Kohl’s (NYSE: KSS), and Macy’s may have been beneficiaries of J.C. Penney’s radical change in strategy, which sacrificed 20% of its sales. Many of these customers are thought to have moved to other department stores.

Clearly, there are better valuations and unfolding news stories than ones presented for Wal-Mart investors.

BillEdson11 has no positions in the stocks mentioned above. The Motley Fool owns shares of Dillard's. Motley Fool newsletter services recommend Wal-Mart Stores. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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