Is Wal-Mart Right for Your Shopping Cart?


By Amey Stone Just the day after Christmas, Wal-Mart (WMT) delivered an unexpected gift for the otherwise bleak holiday shopping season. The retailing giant said pre-Christmas sales came in better than expected -- up around 6% (or as the company put it, in the "upper mid-single-digit range"). What made that a surprise is that only a week earlier Wal-Mart had warned that December same-store sales growth would come in at the low end of the 4% to 6% range.

Retail stocks got a lift from the news on Dec. 26 and continued to climb through the morning of Dec. 28, when a surge in consumer confidence also brought more investors into the sector. "If the Wal-Mart behemoth can post a 6% year-to-year increase for December's same-store sales, then consumer spending is probably livelier than thought," economists at Moody's Investors Service said in a research note on Dec. 27.

Another heartening sign from Wal-Mart was that its "sell-through" is ahead of last year. That means it won't have to mark down holiday inventory to move it. The giant discounter's "inventory is in great shape," says Jeffrey Klinefelter, an analyst with U.S. Bancorp Piper Jaffray. And while some stores report sparse post-Christmas foot traffic, spokesman Tom Williams says Wal-Mart's sales have been brisk and returns light so far.

ONE OF A KIND? "The news is encouraging," not only for Wal-Mart but also for the broader economy, says Richard Church, a Salomon Smith Barney analyst. "It means that if you offer value, the consumer is willing to buy." Wal-Mart shares were trading around $58 on Dec. 28, up from its post-September 11 low of $44.

Of course, not everyone agrees with Moody's and Church that good news for Wal-Mart, necessarily bodes well for retailing and the broader economy. In fact, analysts warn that the strong sales gains could be largely a Wal-Mart phenomenon. "We've always viewed Wal-Mart as kind of in a class by itself in retailing," says Mike Porter, an analyst with Morningstar. "This announcement just confirms it."

It's likely that stores around the country also benefited, as Wal-Mart did, from a surge in last-minute shopping. But for most, it simply means that their sales declines this year won't be as steep as feared. Much of dollar-sales volume was driven by steep discounting, which eats into profit margins. "Few if any retailers will be able to keep pace with Wal-Mart," Moody's concedes.

BIGGER SHARE. In fact, its gains likely came at the expense of other retailers. "When Wal-Mart gets aggressive and price-competitive, it can take share," says John Lawrence, an analyst with Morgan Keegan & Co. Customer counts show that Wal-Mart has added market share since the economy started softening, confirms spokesman Williams. Based on an increase in of mid-week, after-work shoppers, Wal-Mart believes it's attracting customers that don't normally shop there.

Likewise for Wal-Mart investors, strong holiday sales don't necessarily mean it's time to buy more shares now. Analysts continue to recommend the stock as a core holding because the company is well managed with a long record of steady growth and solid results. "Coming out of a weak economy, a growth retailer like Wal-Mart is a stock you want to own," says Church, who has a $65 price target on the shares. "It's one of the best-managed companies, and it still has room to grow domestically and internationally."

Given the stock's recent run, though, a lot more good news will be be needed to spark a further surge. The surprisingly strong holiday results might add up to a penny more in earnings per share at most, says Lawrence. Indeed, analysts didn't rush to change their quarterly estimates on the news.

TEPID RATING. According to earnings-data service First Call, analysts on average expect Wal-Mart to earn 48 cents a share, a 7% increase from a year earlier, on $63 billion in sales in the quarter ending in January, 2002. They expect it to do $216 billion in sales this year and $241 billion next year, according to First Call.

Lawrence says he's waiting to see more sales numbers before adjusting his estimates or his recommendation, which for now is a tepid "market perform." He adds: "The next couple of weeks are still pretty important." On Dec. 31, Wal-Mart will report sales for the Christmas week. Then on Jan. 10 it will report December sales.

For now, the stock isn't cheap: It's trading at a price-earnings multiple of 40, high for the retailing industry. And Wal-Mart's earnings are projected to grow by 14% a year for the next five years -- an impressive rate for such a huge company, but not that exciting if the economy revs up.

NEW WAYS TO GROW. Piper Jaffray's Klinefelter likes the stock, but he's recommending Target (TGT) to his clients over Wal-Mart because it's less expensive (its p-e is 29) and has less international exposure. Wal-Mart's biggest risk for long-term investors remains its size: Has it gotten so big that it can't grow as fast as expected?

Still, Wal-Mart has fought the law of large numbers before, most recently by entering the grocery business and quickly becoming the nation's largest food seller. Now, to fight worries about saturation, it's venturing into smaller communities with smaller stores. "Never underestimate Wal-Mart's ability to find new ways to grow," says Church, who thinks financial or travel services could be its next growth engine.

Morningstar's Porter says the current earnings multiple would be much too high to pay for almost any other stock. But with Wal-Mart, he says, "you have to give them the benefit of the doubt." He terms the stock "pricey but worth it." For investors looking for a core holding to add to a portfolio, Wal-Mart is a solid choice. Anyone interested in an opportunistic play on the economic rebound might also want to step in. Just keep in mind that, thanks to the news on Dec. 26, a lot of investors have gotten there ahead of you. Stone is an associate editor of BusinessWeek Online and covers the markets in our daily Street Wise column


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