Wal-Mart Will Be Great Again

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People are writing off Wal-Mart (WMT). They say that Wal-Mart will never be great again. Citing the company's retail history, failed attempts at reviving its image, and operational meandering, they pronounce the retail giant practically dead on arrival.

They're wrong. I own Wal-Mart stock and believe there are a number of reasons why the company -- at least as a long-term investment – will in fact be great again.

A Tale of Two Companies

Wal-Mart's life as a public company can be divided into two eras.

During the first -- from 1972, when it was first listed on the New York Stock Exchange, to the end of 1999 -- the number of Wal-Mart stores in the U.S. grew from 51 to 2,985. U.S. sales and pre-tax profit took off, growing more than 30% annually, from $78 million to $109 billion and $5.6 million to $8.7 billion, respectively.

Wal-Mart shareholders were rewarded handsomely during that period: Their stock went up -- on average -- 30% each and every year. To put that in perspective, every dollar invested in Wal-Mart in 1972 would have turned into $1,000 by 1999.

Of course, it's been a different story for Wal-Mart shareholders over the past 10 years.

What Has Wal-Mart Done for Shareholders Lately?

From 2000 through the end of 2010, Wal-Mart stock has returned -1% annually, turning every dollar invested into $0.90.
Are store numbers dwindling? Profits dropping? Hardly.

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In fact, over the past 10 years, Wal-Mart has continued to open stores in the U.S., and domestic sales and profits have increased 8% annually, to $260 billion and $19.9 billion, respectively. That's not as good as 30%, of course, but the disconnect between the company's performance and the performance of its stock is interesting.

One explanation for the rising profits and declining stock is that the stock market is forward-looking and pricing in a dismal future for Wal-Mart, as the Motley Fool's Rick Munarriz argued in his article about Wal-Mart's demise:

  • Yes, same-store sales were down for the ninth consecutive quarter in the U.S., with the consumer here only getting more and more stressed.
  • It's true that Wal-Mart's online commerce division is far from an industry leader.
  • And people still -- as the comments that followed Rick's article demonstrate -- don't always have happy thoughts about Wal-Mart.

But that's an incomplete picture of Wal-Mart's real potential. It omits a huge and fast-growing part of Wal-Mart's business that should help shareholders over the next 27 years earn far, far better returns.

Don't Write Off Wal-Mart Just Yet

In the United States today, there is roughly one Wal-Mart for every 81,000 people. In the international markets Wal-Mart currently operates in, it has one store for every 725,000 people.

That suggests a global capacity for Wal-Mart stores of up to 40,000. The company may never get there (remember the rest of the world tends to be a lot poorer), but the opportunity to grow abroad is significant.

FY 2000
FY 2011
Annualized Return
International Store Count
International Sales
$22.7 billion
$109.2 billion
International Pre-tax Profit
$817 million
$5.6 billion

What's more, the company is only just getting started. Sales abroad are rising rapidly, with a 16% increase in the most recent quarter. Although Rick noted that the top line benefited from currency effects, isn't that the point of international expansion? In a world where the dollar is weakening and will continue to do so, those benefits are both real and tangible.

Wal-Mart's Third Act Is Gonna Be a Doozy

Writing off Wal-Mart because of slow domestic growth without considering its accelerated international operations could cause investors to miss a great opportunity.

Put it all together, and I suspect Wal-Mart can grow sales and profits 6% to 10% annually for many years to come. What will the stock do? If history is any guide, it won't keep falling. My own analysis suggests 12% annual returns are more than achievable -- and that Wal-Mart will be great again.

Tim Hanson is The Motley Fool's Lead International Advisor. He owns shares of Wal-Mart. The Motley Fool owns shares of Wal-Mart, and Motley Fool newsletter services have recommended buying shares of Wal-Mart.

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