If you want the best analysis you can get on Wal-Mart (NYSE:WMT), it’s hard to get past the initial reactions by looking at the stock. Shares are down 3% after being up before the notes started coming out from its analyst and investor meeting. The reduced growth plans are still deemed too aggressive today for the next year and its square footage growth is still too high. If Wal-Mart will focus on its core earnings "now rather than later" it can review its core growth strategy once it has Wall Street back on its side.
I was just on CNBC today discussing some of the problems, but the long hard truth is that Lee Scott is not the only answer. My counterparts today defended Scott’s position (Howard Davidowitz and Steve Forbes), but this is now nothing short of cheering for Darth Vader.
Lee Scott is merely the first answer, but his time has passed and he really needs to go. Secondly, the company needs to review its top brass from the top and review its ranks top to bottom (it might even be able to get more out of slightly fewer employees, but the company will have to reward them better). This will immediately result in a growth management deciding that a reduction in cap-ex well under the cuts today and a square footage growth cut well under today’s numbers are needed. Without a systematic review then a change would be merely for the sake of change. The company needs to worry about growing its bottom line rather than the top line and rather than its square footage.
Wal-Mart’s raised guidance this month was only on earnings. The sales numbers weren’t great. But the earnings focus is all that mattered because shares rose nearly 3% on the news. That is because it is an earnings story and not a growth story.
The chart actually has some good news. The chart has this company at a multi-year support level and as long as the company doesn’t roll over again it may be very close to a floor. If not, then you may have to do research on the fate of the Great Atlantic & Pacific Tea Company about its early history of the first 30 years in the 1900’s and look at the stark similarities.
We have been reviewing a theoretical break-up of Wal-Mart for our Special Situation Investing Newsletter subscribers. We do not expect the company will take that path, at least not any time in th near-future. In fact, the board seems impervious to change. But Wall Street will be looking for more than just a Lee Scott firing if this company doesn’t make severe changes quite soon. Mark my words, and you can hold me to this: "If this stock is still stuck here next year, Investors will be calling for a break-up into more easily managed units." When that will be during the year is the question. We have already discussed the thought of a break-up before, but we’ll be offering theoretical values on each unit. We will be reviewing this break-up value with theoretical growth and value models in the coming weeks for our subscribers of the Special Situation Investing Newsletter.
These changes today, at least so far, are not large enough. It is evident that Wall Street wants the retail giant to cut cap-ex more and to slow store expansions and growth even more. It still has room to grow Sam’s Clubs, to grow its Neighborhood Markets, and its international operations. Wal-Mart stock trades at under 14-times fiscal January 2009 EPS estimates. It is dirt cheap, and the reason is because Wall Street views this now as only an earnings story and the company still wants to expand its presence above and beyond what they can effectively manage.
Jon C. Ogg
October 23, 2007
Jon Ogg is the editor of 24/7 Wall St.’s Special Situation Investing Newsletter; he does not own securities in the companies he covers.