Why Wal-Mart May Never Be Great Again
There's more to shopping than low prices.
Wal-Mart (WMT) posted financial results Tuesday morning that aren't as encouraging as they may seem at first glance. Yes, net sales rose nearly 6%, to $108.6 billion, but that was fueled largely by a 10% increase at its Sam's Club warehouse clubs and a currency translation-padded 16% spike overseas. Sales at Wal-Mart's namesake domestic stores clocked in nearly flat.
Earnings per share from continuing operations did spike 12% to $1.09, but that also needs some clearing up. Aggressive share buybacks and a lower effective tax rate are forging the illusion that margins are expanding. In reality, pre-tax profits from continuing operations rose by less than 2%.
Investors may be somewhat relieved -- if not outright pleased -- by the report, but I'm not. Same-store sales at Wal-Mart locations across the United States fell by 0.9%. It's the ninth quarter in the row of cascading comps at the world's largest retailer.
What's Doing in the Discounter
There may be a thousand ways to make a Wal-Mart greeter cry, but all you need are three trends working against the meandering discounter to do it in.
Wal-Mart is losing shoppers. It's falling behind in the digital revolution. There are too many people out there relishing its failures, and it will become a self-fulfilling prophecy if Wal-Mart doesn't wake up and reposition itself properly.
1. Stressed-out consumers
The most popular theory behind Wal-Mart's decline is that the same folks who traded down to Wal-Mart during the darkest recessionary stretches in late 2008 and early 2009 are now simply trading back up to more "chic cheap" discounters or traditional department stores.
Wal-Mart is now leaning on its longtime customers, and that's a dicey proposition when economic uncertainty and sky-high unemployment rates are thinning out what little discretionary income they previously had.
The trend is real, but it doesn't explain away all of Wal-Mart's problems. After all, are we to assume that same-store sales will spike higher if we do swan dive back into a recession, the way some economists now believe?
I'm not buying it, because there are two other trends -- digital migration and percolating anti-Wal-Mart sentiment -- eating away at a potential turnaround in a more permanent way.
2. Weak navigation of the digital divide
Some folks don't want to be seen at a Wal-Mart; apparently a lot of people don't want to be seen at walmart.com, either.
Wal-Mart announced a major organizational restructuring of its online operations late last week. Things clearly aren't going too well in cyberspace, even though Wal-Mart's penchant for low prices should sell well when shoppers don't have to navigate through massive parking lots and cavernous superstores to shave a few pennies at the slow-moving register.
Trade publication Internet Retailer reports that Wal-Mart -- despite being the world's highest-grossing retailer -- is lagging behind several bricks-and-mortar chains, including office supply specialists Staples (SPLS) and Office Depot (ODP), in e-commerce.
I'm stumped on that one. The digital convergence of traditional media is here. Folks are downloading music, movies, games, and novels, and it's eating into the physical sale of CDs, DVDs, video games, and books. Why would Wal-Mart turn its back on the one musical format that's growing while its stores continue to stock cobweb-collecting Justin Bieber CDs?
Even if it was being schooled by Apple's (AAPL) iTunes Music Store, how will Wal-Mart ever become an online retailing force when its digital offerings are about to become woefully incomplete?
Another example of Wal-Mart's digital missteps came five years ago when walmart.com tried to cash in on the percolating social-networking craze by launching the School Your Way hub.
Wal-Mart naively figured that image-conscious teens would want to hang out on a restrictive, whitewashed community site revolving around Wal-Mart product wish lists ahead of the back-to-school shopping season. It was a disaster, and Wal-Mart shut it down just two months later.
Every time Wal-Mart tries to do something trendy -- along the lines of selling Internet access or renting mail-delivered DVDs -- it winds up falling on its face.
3. The haters
Lastly, a lot of people want to see Wal-Mart fail. They hate the way the corporate behemoth shakes out the mom-and-pop operators. I'm not that spiteful. I can actually appreciate Wal-Mart's frenetic inventory turns that create the opportunity for low and honest markups on items. If folks save money at Wal-Mart, the money saved will likely work its way back into the community by being spent locally.
Wal-Mart has never had a problem getting its value message out there. Folks just don't care. It was selling MP3s for less than iTunes, but apparently that didn't matter to earbud-donning e-shoppers. Target (TGT) gets slapped with the "cheap chic" label, but it wears it with pride.
Post "I'm going to Target" on Facebook and favorable responses will trickle in. When's the last time you saw someone bragging about going to Wal-Mart through Facebook or Twitter?
The closest thing Wal-Mart had to being cool was in 2008 when it put out exclusive The Eagles and AC/DC CDs. It could have aimed younger -- or at least more timely -- but at least it was able to get recording legends to commit to the discounter.
These days, the sound of Wal-Mart is a more ominous tune.
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Longtime Motley Fool contributor Rick Munarriz does not owns shares in any of the stocks in this article. The Motley Fool owns shares of Wal-Mart Stores and Apple. Motley Fool newsletter services have recommended buying shares of Wal-Mart Stores, Apple, and Staples.