Wal-Mart Finally Embraces Its Gritty Image


Great selection, low prices, and tolerable shopping conditions are Wal-Mart's (WMT) winning formula. Finally, the company is starting to see it that way, too.

A decade ago, Wal-Mart's stock was overpriced. The company's rich price tag became its penance as it spent the better part of 10 years trying to grow into its valuation of yore. So it made improvements in margins, earnings, and operational returns. Still, the share price barely budged.

Then Wal-Mart did something really stupid: It tried to copy Target (TGT).

If Target Jumped Off a Cliff...

The company pulled thousands of items off its shelves and went trendy and upscale with its threads. And it did this just as the U.S. was entering a recession. Bad move.

A few years and one new CEO later, Wal-Mart began to realize what you knew all along: If people wanted a shopping experience like Target's, they would just go to Target.

Fake It Till You Don't Make It

Learning to embrace your gritty self isn't easy, but Wal-Mart now realizes that it's not just another pretty face in the neighborhood.

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You know Wal-Mart. The smell. The crowds. The lines. The world's largest retailer. The nation's largest private employer. You could live in one, and while you might end up looking like a sun-starved creature from an H. G. Wells novel, at least you'd have access to ammo, Corn Flakes, and underwear.

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CEO Mike Duke is recluttering shelves and going back to basics. It's a strategy that should start to reverse the company's two-year trend of declining U.S. same-store sales. This alone should boost the stock price. But I see even more reasons that an investment in Wal-Mart right now will pay off down the road:

1. Dividends: Wal-Mart is now a dividend stock yielding nearly 3%, and its payout is up double digits over the past 12 months.

2. International expansion (and online sales): Wal-Mart may have missed in Germany and South Korea, but it's the bomb elsewhere. It's the best operator in the sophisticated U.S. retail market, so it brings serious intellectual reserves when it expands overseas.

3. Valuation: This may be a bit of a catch-all, but it's my favorite single reason for feeling good about Wal-Mart's future. Baking conservative-to-mid-range assumptions into my discounted cash flow model yields a valuation of $65 per share -- high enough to offer a 20% gain to investors who buy today.

What Could Keep Wal-Mart in the Markdown Bin?

The risk is that I'm wrong. Adding more items might not bring the throngs of humanity back into the stores (although they appear to have returned to the one in my neighborhood), and Wal-Mart could get nipped from dollar stores on the low end and Amazon.com (AMZN) on the higher end.

But over the decades, Wal-Mart has demonstrated that it's a superior retail concept. Putting entire towns out of business isn't easy, and whatever you think that says about Wal-Mart, it says a lot less about the towns -- or at least the viability of their retail offerings. I'm not being harsh, just realistic: Business evolves like everything else, so put your money with a winner.

The Bottom Line

Think of Wal-Mart as a bounce-passer and lay-up artist -- the kind of player that puts points in your portfolio while letting the highfliers grab the spotlight. The game is on, investors, and the low price on Wal-Mart's stock won't be around for long.

James Early is a Motley Fool analyst. The Motley Fool owns shares of Wal-Mart and a box of Corn Flakes, but neither ammo nor underwear.