Has Wal-Mart Gone Terminal?

I got a few interesting responses last week to an article in which I posed the highly sophisticated question, "What's the deal with Wal-Mart (NYSE: WMT  ) ?"

One reader thought the Street might be worried about Wal-Mart's occasional, well-publicized labor disputes, including a fear that the firm's workers might somehow go union.

Another thought it might just be the threat of competition from Costco (Nasdaq: COST  ) , Target (NYSE: TGT  ) , or Sears (Nasdaq: SHLD  ) -- and by the way, I will never get used to that ticker for that company. And a while back, someone from a hedge fund suggested to me that those types were counting on major Wal-Mart problems overseas and might even be shorting on that hunch.

My suspicion, based on the thin evidence of media reports and the bobblehead chatter on CNBC, is that investors are worried that there's not much growth left for Wal-Mart. I even saw someone denigrating the firm's reported 4.1% comps increase -- a hearty gain over last year's meager 2.9% -- as pundits predicted that gas costs would cut into Wal-Mart shopping. This, of course, is what investors thought last fall, and it didn't happen then.

I'm not saying it couldn't happen now. And I'm not saying investors shouldn't worry about Wal-Mart's capacity for growth, but I will suggest that Foolish investors refrain from a couple of habits of the short-sighted Wall-Street Wise: (1) Don't make a stock decision based on predictions of consumer behavior, and (2) don't judge Wal-Mart by a few years' worth of reduced performance.

Here's what Wal-Mart's comps have looked like since 2000.

2005 2004 2003 2002 2001 2000
2.9% 3.9% 5.7% 6% 5% 8%


That does look like a slight, but slightly disturbing, trend. And it's echoed on the top line (see chart at end of article).

But, notice that earnings growth has outpaced revenue growth in just about every year. That's because as Wal-Mart grows, it continues to take advantage of its scalability. And furthermore, this isn't the first time Wal-Mart has gone through a rough spell for comps. In 1996, same-store sales dropped to 4% after being at 7% for the prior year. In 1997, they improved to 5%, then 6% a year later, before heading off the races again and hitting 9% in 1999.

Looking at an old 10-K is instructive. Wal-Mart hasn't seen double-digit comps since 1993, and even then, the number wasn't even into the teens. How has Wal-Mart done over its first decade of "slowdown"? Take a look here.

I'm not saying Wal-Mart isn't slowing. I am suggesting that stock watchers keep an eye out to see whether the Street bids it down too far. Does Wal-Mart deserve to be discounted to the point where it's trading at multiples comparable with those given its peers? Decades of outperformance clearly suggest otherwise.

For related Foolishness:

Top-Line Trends 2005 2004 2003 2002 2001 2000
Total Revenues
($ billions and (% growth))
$285 (+11%) $256 (+12%) $230 (+13%) $204 (+13%) $181 (+16%) $156
EPS from continuing
operations (% growth)
$2.41 (+19%) $2.03 (+15%) $1.76 (+22%) $1.44 (+6%) $1.36 (+12%) $1.21


Seth Jayson doesn't actually shop at Wal-Mart, but he's not averse to eyeballing it as an investment. At the time of publication, he had positions in no firm mentioned. View his stock holdings and Fool profile here. Fool rules are here.


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