This Simple Chart Shows Why Wal-Mart Is in Trouble

After revolutionizing and then dominating retail for over five decades, Wal-Mart (NYSE: WMT  ) may finally be succumbing to the same fate as former retailing legends such as Woolworth's and Montgomery Ward.

While it's too early to make a definitive prediction, there's nevertheless one indisputable reason to believe that Wal-Mart's best days are behind it: Same-store sales at the retail giant have dropped in 14 out of the last 21 quarters.

Why same-store sales matter
The importance of this metric -- also referred to as comparable sales or "comps" -- can't be denied. By measuring revenue at existing locations on a year-over-year basis, comps allow investors to determine whether a retail chain is growing because of an increase in popularity among consumers or rather because it's building more stores.

In this way, same-store sales serve as proxy for customers' perception of a brand. If they're shopping there less frequently or spending a smaller amount each time they do, then the resulting negative comps would serve as strong evidence that something is amiss.

Moreover, among the largest costs for a company like Wal-Mart are capital expenditures to build and maintain physical locations, many of which are more than 200,000 square feet in size. After these are in place, in turn, the objective is to leverage the locations to the greatest extent possible with progressively higher sales per unit.

Finally, even if comps are only marginally positive, the reality is that a retailer would still be contracting in size on a unit-by-unit basis. This is because inflation will typically offset between 1% and 3% in otherwise positive organic sales growth.

In the first quarter of this year, for instance, consumer prices increased by 1.05%, according to data from the Federal Reserve. Thus, to combat erosion in profits, Wal-Mart's comps would need to increase by at least that amount.

That they haven't is evident in the Arkansas-based company's gross margin, which represents the difference between Wal-Mart's sales and cost of goods sold. Since 2009, this figure has dropped by approximately 100 basis points, from roughly 25.6% in 2009 down to 24.57% today.

The implications for Wal-Mart
So, what are investors and consumers to make of this?

On one hand, betting against Wal-Mart still seems like a (small "f") fool's errand, given the size and efficiency of its distribution network as well as the experience of its leadership team.

On the other hand, for arguably the first time in the last few decades, Wal-Mart is facing legitimate (some might even say "superior") competition from the likes of and Costco.

And along these lines, it's also worth noting that Wal-Mart hasn't done itself any favors. Over the past few years, it's continued to foster a reputation for exploiting workers, gotten bogged down in a bribery scandal in Mexico, and has even struggled to keep its shelves stocked with merchandise.

Whether these struggles are enough to tip the inevitable scales of progress and innovation against it remains to be seen. But things certainly don't look good.

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  • Report this Comment On June 29, 2014, at 10:16 AM, oldpapajerry wrote:

    Having spent forty plus years in retail, one truth that will always remain is "innovate or die".

    The idea of "leading from behind" as is happening with the Obama administration is a prime example.

    Once your competition moves ahead it is nearly impossible for any large organization to pivot and catch up.

    Walmart, has grown to be to big to succeed, and it's same store sales indicate that. To unwieldy to navigate the fast changing digital marketplace, without striking the obstacles along the way.

    The marketplace is littered with such examples, Sears, K-mart, Gemco, White Front and J.C. Penney are just a few examples.

    Each in their time, the "perfect" retailer, but their time passed them by, while the executives sat in their massive offices and gloated over their successes.

    People on the bottom of the ladder could see the writing on the wall, and tried to tell them, but alas, the execs and their "yes" men and women could not see it.

    No, they were content to sit, as the executive board of Walmart has been doing, navel gazing, and adding more lines to their golden parachutes.

    Like our government, without consequences to their actions, people will continue to do the same thing over and over again until their retire or the project is cancelled.

    It is time for a new board at Walmart, not a bunch of retread board members from other failed or failing companies, or politicians whose past votes in favor of the corporations have gained them their positions.

    New Blood, New Ideas... Old Ideas brought forth in new ways.

    Look at the "New" methods of marketing employed by AliBaba. This Chinese company was non existent ten years ago, yet has moved into the marketplace, just as Walmart did thirty years ago.

    This is, or soon will be the single company with the largest market cap in the world.

    This is not a M/C based on "Blue Sky" like the dot coms, it is based on international sales.

    Do they have problems with quality and intellectual property theft, you bet.

    Are they working to address them, absolutely, because the Chinese people and government don't look at tomorrow, they think generationally, three and four generations down the line.

    Another step would be to "Lease" out some of the departments, Automotive, and Electronics, Jewelry, allow companies with the knowledge and expertise to run them properly, do so and the grocery department, get someone who knows what they are doing.

    IF Walmart were smart, they would embrace the online experience, and incorporate it into the already overstocked stores.

    As an example, get rid of the MC Donnalds in the stores, hire someone creative to develop a moderately priced food court, add to that an online shopping experience, right in the stores.

    One where the customer can sit down at a nice table with comfortable chairs and browse and shop online while enjoying a "nice" sandwich and salad, with their kids.

    This will encourage buying and bring people into the Walmart for more than just some "cheap, poor quality products".

    Next, improve the quality, having been in retail for a long time, and more particularly the grocery side, i can tell you the produce that Wallmart brags about in the latest TV ads is what we used to call "CULLS".

    As my father used to say, "the bitterness of low quality will remain, long after the sweet taste of low prices dissipates".

    There will always be that segment of the population who for economic reasons, need to buy the lowest possible priced items, regardless of the poor quality.

    But basing your business model on these individuals, is the same as the government looking to the poor to pay the lion's share of taxes, they just don't have it.

    To summarize, smaller stores, better quality, clean up the aisles, get rid of McDonnalds and consider department leasing.

    Make Walmart what it can be instead of what it once was.


  • Report this Comment On June 29, 2014, at 11:05 AM, mathari wrote:

    The problem is people are cutting back and only buying absolute essentials in the US because of income inequality that is worse than most third world countries. WMT's strategy appears to be to open a whole bunch of mini Walmart grocery stores throughout the country and to take over that business - competing with the likes of Kroger and Safeway - but this is a mistake as Walmart cannot be as nimble as they guys.

    Another strategy appears to be to increase international sales so it reaches 50% of sales. Already, 40% of Walmart's workforce is outside the US. In the US, there are ~5000 stores providing net sales of $340B. Outside the US, there are 6,100 smaller boutique style stores in 26 countries (not named Walmart) with net sales of $136B. This expansion is in Latin America, Asia, UK, Canada and Africa.

    Operating profits are a problem for Walmart when it comes to international growth. Domestically, profits are around $ 20B and internationally only $6B displaying a much lower profit margin on the international side.

    Another problem is Amazon (AMZN) which is slowly eliminating brick and mortar competition in general and starting to provide free local delivery in bigger cities.

    A third problem is the growth of alternative fresh and organic product stores like WFM and TFM in upper class areas which are stealing the rich consumer from Walmart using pesticide free, organic, and chemical free alternatives.

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