Wal-Mart Defies This Analyst's Expectations

Consumers are becoming more and more socially conscious, and want the goods and services they use to measure up. In truth, it doesn't take much. A simple action that costs a company very little or nothing at all can make a real difference in the mind of the consumer.

Often, the added expenses a company incurs from paying workers a little more, monitoring resource sourcing, or going the extra ethical mile are small downsides when compared to the huge potential upside. And where there's company upside, there's investor upside.

Today, let's dive deep into retail leviathan Wal-Mart (NYS: WMT) and evaluate its socially conscious policies and practices while taking a hard look at the numbers. We'll analyze the company in terms of its performance as a business, an investment, and as a socially conscious enterprise.

I have seen the enemy ... and they're actually pretty cool
Wal-Mart is a traditional target of socially-conscious investors and citizens. To them, Wal-Mart is the enemy, invading peaceful, sleepy towns; bulldozing acre after acre to construct enormous, ungainly stores; and ruthlessly driving smaller area retailers out of business. But a visit to the company's website -- and an open mind -- may change this perception.

An entire section of Wal-Mart's website is devoted to sustainability. And while many companies feel they need something like this to appear politically correct, Wal-Mart's sustainability section is extensive, and lists many ways in which the company is holding itself socially accountable, including:

  • Global Responsibility Reports, dating back to 2005, that highlight current environmental and socially responsible goals and measure the company's progress in meeting them.

  • A Sustainability Index that monitors product lifecycles and measures whether said products are safe, how long they can be expected to last, and whether or not they were produced in a responsible manner.

  • Sustainable Value Networks that brainstorm and implement initiatives for integrating sustainable practices into every part of the business.

But perhaps the simple, straightforward environmental mission statement at the top of the main sustainability page sums it up best: "At Wal-Mart, we know that being an efficient and profitable business and being a good steward of the environment are goals that can work together." Now let's take a look at the numbers and see how the company's business and stock are performing.

Imitation: still the sincerest form of flattery, and very profitable
Unless humanity decides to go en masse off the grid to take up life in the woods, Thoreau style, people will always need to shop. And as much as Wal-Mart has been vilified over the years for its giant, one-stop-shop stores that sell everything from clothes to household goods to groceries, the company has truly revolutionized shopping. Today, it's easier and faster than ever for people to get all their shopping done in one place at economies of scale that result in great prices.

It's a model that has taken off and been taken up by other, successful one-stop-shop rivals such as Target (NYS: TGT) and Costco (NAS: COST) . These sustainable practices could become a big differentiating factor for retailers like Wal-Mart from the constant threat of Amazon (NAS: AMZN) . The one-stop online shop often times best bricks and mortar retailers with regard to price, but we've seen consumers are often willing to pay just a little more for a sustainable good from a socially conscious company. (Take one look at Whole Foods if you doubt it.) If Wal-Mart can stay ahead of Amazon in the public's perception of social responsibility, it could spell gains down the road.

By the most recent numbers available for the retailing giant:

  • Quarterly revenue grew a very healthy 8.1% YOY.

  • Quarterly earnings were, unfortunately, down a not-so-healthy 2.9% YOY. We'll have to check back in on this one.

  • The balance sheet holds $7.06 billion in cash, along with $59.32 billion in long-term debt. That's a lot of debt, but at least money is cheap right now, and as a day-to-day cash-generating machine, the company should be able to keep up with its debt payments.

Gross margin is 25.04% TTM for Wal-Mart. Target manages a noticeably better 29.94%. This is largely fueled by the more upscale "cheap chic" market Target is going after. Wal-Mart is more interested in slashing prices to the bone, while Target seems more interested in highly affordable, but more trendy, goods. While gross margin is typically an indicator of brand strength, in this instance it's more indicative of the broader business models for these firms. Considering that, Wal-Mart's 25.04% gross margin is solid.

Costco's gross margin is a surprisingly low 12.48%, but the company is known for keeping margins very low, passing those savings directly to its customers. Costco, in fact, actually makes the bulk of its money from its annual membership fees, selling its merchandise practically at cost.

Making money and a making a difference
Wal-Mart's stock is trading for an affordable $61 per share with a highly agreeable P/E of 13. Costco, which has become downright fashionable both as a place to shop and as an investment over the last few years, is trading with the significantly higher P/E of 25. Wal-Mart even pays a nice little dividend of 2.4%. All things considered, if you're looking to invest in a successful retail behemoth, why not go with the one that's on sale and puts something in your pocket every quarter?

Wal-Mart has changed the way the world shops, making people's lives a little easier and more convenient in the process. And it's a company that's now trying to do the right thing from a social-responsibility perspective. Are any companies perfect in this regard? No, but, to paraphrase Voltaire, it's important to never let the quest for the perfect drive out the good.

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At the time thisarticle was published Fool contributorJohn Grgurichquotes Voltaire whenever he gets the chance, though his German Shepherd prefers Nietzsche. Neither owns shares of any of the companies mentioned in this column.The Motley Fool owns shares of Wal-Mart Stores, Amazon.com, Costco Wholesale, and Whole Foods Market.Motley Fool newsletter serviceshave recommended buying shares of Costco Wholesale, Amazon.com, Whole Foods Market, and Wal-Mart Stores; and creating a diagonal call position in Wal-Mart Stores. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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