Should Wal-Mart Fall Into the ‘Worrying’ Category for Investors?

By Madhuchhanda Chatterjee - September 25, 2012 | Tickers: AMZN, TGT, WMT | 0 Comments

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The second quarterly report released recently showed a somber tone for the Wal-Mart Stores (NYSE: WMT), especially in comparison to the more upbeat reports of other retailers. Low US Sale figures are worrying company officials and investors alike. Economic downturn and constrained expenditure may be to blame, officials say. But the reasons may lie far deeper.

The Picture Presented
The retailer giant is still reeling from the ramifications of the bribery scandal, which shocked the world in April. Although constant controversy has marked Wal-Mart’s rapid expansion in Mexico over the last 15 years, the exposure of this illegal practice still came as a somewhat shock. Shares were down by almost 5% as a result.

Wal-Mart’s expansion policy also faces a severe crunch as critics hail the Mexican fiasco as an example for why Wal-Mart should not be allowed to flourish. In Los Angeles, a Wal-Mart building permit is getting an once-over. In New York, the City Council is investigating a possible land deal with the retailer’s developer in Brooklyn. A state senator in California is pushing for a formal audit of a proposed Wal-Mart in San Diego. And in Boston and its suburbs, residents are pressuring politicians to disclose whether they have received contributions from the company. Local businessmen are getting more and more vocal in their opposition.

Finally sales in the recent quarter give a very bleak picture.

 “Consumers aren’t panicked about the economy, but they are worried,” Craig Johnson, president of Customer Growth Partners, wrote in a research note. Sales growth for top retailers slowed to 3.4 percent in the second quarter of 2012 compared with a year ago, according to Mr. Johnson’s analysis. In the first quarter, sales rose 6.2 percent compared with a year earlier. (Thirty of the 40 major retailers he tracks have reported quarterly results so far.) Consumers “are still buying, but they’re buying less and they’re buying closer to need,” he wrote.

Quarterly reports from Target (NYSE: TGT), Macy’s, Home Depot and other large retailers, and a government report showing strength in consumer spending in July, painted a more optimistic picture. Target posted a same-store sales increase of 3.1 percent and said that shoppers were starting to buy discretionary items again, though it said staples were still very popular. It begs the question: Is it really the economy, or is it Wal-Mart who is going down?

Does this mean investors should look for more optimistic endeavors?
Although the future looks grim, it is, in no way, set in stone. For the past 50 years, Wal-Mart has gained a strong foothold globally, and it is not going down without a fight. Wal-Mart is making a push in South Florida with planned expansions and new stores, especially in urban areas of Miami-Dade County. It plans to invest about $350 million in South Florida over the next two years, The Miami Herald reports.

While the company is reducing or delaying growth plans in Brazil, China and Mexico, international sales continue to grow at a quick clip, increasing 6.4 percent to $32 billion. The company now plans to open 21 million to 23 million square feet of space in fiscal year 2013, Douglas McMillon, chief executive of Wal-Mart International, said in prepared remarks.

Wal-Mart has also taken steps to maximize retail sales. In September 2012, Wal-Mart said it was dropping Amazon’s (NASDAQ: AMZN) Kindle tablets and e-readers, a sign of how seriously it views Amazon as a competitor in the consumer goods market.

Wal-Mart did not specify why it was discontinuing its Kindle sales, but analysts said it was not hard to decipher, given that the retailer will still sell similar devices from companies like Apple, Google, Barnes & Noble and Samsung. Physical retailers have been worried about customers who browse in stores and then buy from online competitors instead. Displaying the new Kindles encourages that behavior, analysts said.

Conclusion
Wal-Mart’s recent policies indicate just how serious the company is about making the upcoming fiscal year much better. To sum up, I doubt Wal-Mart will be in this rut for long. Local sales, though strained, are already looking up, while, international figures are at an all-time high. Investors can safely rely on the retail giant now and in the future.

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