Fashion Risk at Wal-Mart?

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It's hard to build a good business, even harder to keep it growing, and harder still to occupy the top spot and not lose track of the values and virtues that built your empire. Such might be the challenge for Wal-Mart (NYSE: WMT) today. The biggest threat isn't some ethics-driven customer backlash (you'll notice that Wal-Mart's parking lots remain full), but rather losing touch with what first brought those customers to the stores in droves.

The megaretailer's fourth quarter was hardly disappointing. Sales were up almost 9% companywide, and comp-store sales increased 3.1%. Margins improved yet again, and operating income rose just under 11% for the quarter.

Sam's Club was the laggard in both sales and segment income growth, but it still grew. The domestic Wal-Mart business seems to be getting a solid boost from the superstore concept (and good comp numbers for food sales), and the international business is growing at a double-digit clip.

What might worry me a bit if I were a long-term holder, though, is the company's recent decision to go upmarket with some of its fashions. I mean, who among us has ever really thought of Wal-Mart as fashionable? Isn't that really supposed to be Target's (NYSE: TGT) niche? Its cheap-but-still-stylish clothing and housewares have earned it the French-sounding "Tar-jhay" nickname.

In my opinion, the risk here isn't that Wal-Mart will alienate its customers, but that it'll snarl what is presently a top-notch distribution system. If their new fashions don't sell, they'll gum up the works with excess inventory, chewing into inventory turns, working capital, and so on.

Wal-Mart's stock looks value-priced, but I still have some qualms about the company. It's so large that's it's basically a play on overall consumer spending, and the company still has a ways to go before it matches Carrefour internationally. I'm not too worried about the ever-present headline risk here, but I do wonder what kind of market-beating returns can be made from a company that is already so large.

For more related Foolishness:

• New Targets for Target
• Wal-Mart's Latest Black Eye
• Does Wal-Mart Deserve to Be Hated?

Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).