2 Alternatives To The Wal-Mart PR Debacle

Bill is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Wal-Mart (NYSE: WMT) is a public relations nightmare. Even though it does great charity, both on a local level and on a national scale, its aggressive labor cost controls, anti-union stance, and list of corporate scandals have turned off a lot of potential customers. Investors should require a valuation discount relative to its competitors to invest in a firm with such a dark cloud around its brand.

Wal-Mart Does Good Things, Too

First and foremost, we should all respect Wal-Mart’s contribution to the economy. It employs more people than any non-military organization. Moreover, a substantial part of its footprint came from rural America, which other corporations had largely abandoned or discounted.

The spin on this is that Wal-Mart does destroy small businesses. An equally relevant spin would be that Wal-Mart is more efficient than small businesses that were charging wider margins for nearly identical products. You can pick whichever you like, but be consistent. I prefer competition to local monopolists. If you hate having to pay a premium for refreshments at movies and sporting events, then it is inconsistent to get angry at Wal-Mart outcompeting local businesses that have been exploiting small communities with high mark-ups.

Wal-Mart also jumps in on charitable efforts. As one of many companies that assisted the victims of Hurricane Sandy, Wal-Mart won the affection of leaders and citizens in the region. Wal-Mart is among the 39 companies as part of the Red Cross that have each pledged $1 million each in advance for disasters. In collaboration with other companies, such as JPMorgan Chase, and Walt Disney among others, more than $85 million was raised towards this cause.

This fundraising effort has been praised by political leaders affiliated with the region. The hurricane caused economic damages estimated to be more than $50 billion. These companies not only assisted the leaders in providing relief, but also put effort into helping the people deal with the aftermath of the hurricane. Chris Christie, New Jersey Governor said, “I want to thank Wal-Mart.” He added, “They have been extraordinarily generous to the state of New Jersey in many different ways.”

Despite the praise Wal-Mart received for this initiative, other companies managed to give more funds. The Red Cross has also received donations from a number of corporations such as Kohl’s (KSS), Target (NYSE: TGT), and Citigroup (C) among others. These funds have contributed to the increased Red Cross efforts across the US in the past 5 years. All-in-all, Wal-Mart did a good job in corporate citizenship. It was not a leader, but it definitely did participate.

Public Relations: Mission Impossible

Wal-Mart is currently catching flack for its difficulties placating employees before black Friday. This is only the most recent of Wal-Mart’s many problems plaguing its image.

Gender Discrimination Case

Wal-Mart’s 11-year-old  gender discrimination lawsuit still makes 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.

In 2001, women from several different Wal-Mart locations in the California area filed this gender discrimination lawsuit. They believe they were denied career opportunities and salary increases and because they are women.

The workers’ lawyers successfully argued that Wal-Mart's policies affected women at many of their stores all over the country, making the case as a class action lawsuit. Wal-Mart claimed that these decisions were made by local managers and were not a company-wide policy, appealing the class action certification.

International Bribery

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.

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 discount retail peers:

<table> <tbody> <tr> <td> <p><strong>Ticker</strong></p> </td> <td> <p><strong>Company</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> <td> <p><strong>P/FCF</strong></p> </td> </tr> <tr> <td> <p>BIG</p> </td> <td> <p>Big Lots</p> </td> <td> <p>9.93</p> </td> <td> <p>0.31</p> </td> <td> <p>2.38</p> </td> <td> <p>10.93</p> </td> </tr> <tr> <td> <p>TGT</p> </td> <td> <p>Target</p> </td> <td> <p>13.97</p> </td> <td> <p>0.57</p> </td> <td> <p>2.52</p> </td> <td> <p>20.48</p> </td> </tr> <tr> <td> <p>WMT</p> </td> <td> <p>Wal-Mart Stores</p> </td> <td> <p>14.2</p> </td> <td> <p>0.5</p> </td> <td> <p>3.14</p> </td> <td> <p>25.56</p> </td> </tr> <tr> <td> <p>DLTR</p> </td> <td> <p>Dollar Tree</p> </td> <td> <p>16.24</p> </td> <td> <p>1.3</p> </td> <td> <p>6.12</p> </td> <td> <p>23.49</p> </td> </tr> <tr> <td> <p>DG</p> </td> <td> <p>Dollar General</p> </td> <td> <p>18.57</p> </td> <td> <p>1.03</p> </td> <td> <p>3.36</p> </td> <td> <p>38.07</p> </td> </tr> <tr> <td> <p>FDO</p> </td> <td> <p>Family Dollar Stores</p> </td> <td> <p>19.37</p> </td> <td> <p>0.86</p> </td> <td> <p>6.17</p> </td> <td> <p>NA</p> </td> </tr> <tr> <td> <p>COST</p> </td> <td> <p>Costco Wholesale</p> </td> <td> <p>24.83</p> </td> <td> <p>0.42</p> </td> <td> <p>3.38</p> </td> <td> <p>36.92</p> </td> </tr> </tbody> </table>

Most of these discount stores are expensive. With the exception of Wal-Mart, Target, and Big Lots (NYSE: BIG) these firms trade at earnings multiples in excess of the S&P 500. Investors seeking defensive stocks in this industry should be selective and only consider these three stocks since they are attractively valued.

Why are so many of these discounters priced for growth? Apparently the market expects that consumers will flock to the inferior goods offered by dollar stores, and investors are bidding up their prices in anticipation. This consumer behavior is already “baked in” the stock prices of Dollar Tree (DLTR), Dollar General (DG), Family Dollar (FDO), and Costco (COST).


Investors should exercise discipline and avoid paying a premium for trendy industries. This narrows investible discount retail stocks to Target, Wal-Mart, and Big Lots.

We looked for a valuation discount for Wal-Mart’s bad press and we didn’t see one relative to its big box peers. Since Target and Big Lots are as cheaply or more cheaply valued than Wal-Mart, investors should focus on these two stocks. Target and Big Lots are cheaper Wal-Mart alternatives which avoid the Wal-Mart public relations mess altogether.



BillEdson11 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus