Has Wal-Mart Hit the Wall?

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Wal-Mart (NYSE: WMT  ) should have been a shoo-in for a great holiday quarter. Instead, the megadiscounter's fourth-quarter results cast ominous shadows on the company, consumers, and the entire retail scene.

Wal-Mart's fourth-quarter net income surged 23.7%, to $4.7 billion, or $1.21 per share. Revenue increased 4.6%, to $112.8 billion. But the big, thought-provoking bummer in Wal-Mart's message was its 1.6% drop in U.S. same-store sales (not including fuel). In fairness, the company faced a tough comparison to last year's 2.4% comps increase. Just like last quarter, Wal-Mart blamed price deflation in food and electronics for its sluggish performance.

Still, Wal-Mart's lackluster numbers raise several grim questions. Are its traditional core customers currently suffering so much they can't buy as much as they used to? And if some budget-conscious consumers traded down to Wal-Mart last year, are many feeling better now, and moving back up to higher-end retailers?

Worse yet, this performance occurred during the holiday shopping season, when Wal-Mart boldly launched multiple price wars against rivals such as Target (NYSE: TGT  ) , Costco (Nasdaq: COST  ) , and Borders. At the time, the company said it wouldn't be beaten on price during the holidays, a strategy it hoped that would boost comparable-store sales. Looks like that didn't work out so well.

Even Wal-Mart's 2010 guidance disappointed; the company expects just a 5%-8% increase in earnings. In contrast, yesterday's quarterly results from Whole Foods Market (NYSE: WFMI  ) showed many heartening signs of recovering fortunes. But unlike Wal-Mart, it faced easier comparisons to its troubles a year ago.

Investors shouldn't give up on the Bentonville Behemoth quite yet. The consumer climate remains weak, with unemployment high and many companies still announcing layoffs. Meanwhile, master investor Warren Buffett of Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) recently bought more shares of Wal-Mart.

I doubt it's wise to count Wal-Mart out as a defensive stock in an uncertain climate. The company returned some $11.5 billion to shareholders in the just-completed fiscal year, and reaffirmed its commitment to share repurchases.

Has Wal-Mart's recessionary advantage eroded? Or is this a great time to buy the stock? What's your outlook for consumers and retail in general? Sound off in the comment boxes below.

Stock up on related Foolishness:

Wal-Mart Berkshire Hathaway, and Costco are Motley Fool Inside Value picks. Berkshire Hathaway, Costco, and Whole Foods Market are Stock Advisor recommendations. The Fool owns shares of Berkshire Hathaway and Costco. Try any of our Foolish newsletters today, free for 30 days.

Alyce Lomax owns shares of Whole Foods Market. The Fool has a disclosure policy.

Read/Post Comments (7) | Recommend This Article (11)

Comments from our Foolish Readers

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  • Report this Comment On February 18, 2010, at 4:11 PM, lemoneater wrote:

    I noticed over the holidays that my local Walmart had some stocking problems. When I couldn't find what I needed, I went elsewhere. I think my local store reduced its staff at the wrong time. (A rather frank, somewhat overworked employee when asked gave her opinion that there were not enough stockers.) Recently it has been much better so I assume that local management realized that something needed to be done.

  • Report this Comment On February 18, 2010, at 10:25 PM, rvnutman wrote:

    i can really see why WM's sales are sluggish. Take a look at their stores. All of the "dead" space within. Empty space at the front of the stores, walking space as much as a football field. Promotional items are no longer displayed, reduction of SKU's and elimination of employees thru reorgs and restructuring. I hate to see this retailer struggling because it has become such an influence in the business universe. During the holiday season when retailers are using all avenues for sales, this organization cleans up their stores while other retailers use the clutter principle to gain sales.

  • Report this Comment On February 19, 2010, at 1:28 PM, ewmoede wrote:

    People seem to be missing point on sales

    Reduce prices stunt the rate of growth;however do

    Not stunt the margins/ profitablity or real growth in

    profit; no wondering Buffett is buying

  • Report this Comment On February 19, 2010, at 4:29 PM, 98analysis wrote:

    I agree with Buffett on Walmart. For Walmart, I'd probably look at its numbers in its financial reports rather than visiting its local stores.

    Since U.S. is in recession, and Walmart has stores in other countries, visiting local Walmart stores may not give one a fair picture of Walmart's true performance.

  • Report this Comment On February 19, 2010, at 4:36 PM, 98analysis wrote:

    I agree with Buffett on Walmart. For Walmart, it's better to look at its numbers in its financial reports than visiting its local stores.

    Since U.S. is in recession, and Walmart has stores outside U.S., visiting local Walmart stores may not give one a fair picture of Walmart's true performance.

  • Report this Comment On February 20, 2010, at 9:27 PM, g7r0 wrote:

    I've been a buyer too though it has seemed to be in a range of 52 to 55 for a while. Same store sales didn't bother me as long as nicely profitable (which it is). I think the issue was Q1 guidance. Walmart has a unique view because of the way their quarters fall. Q4 is Nov. to Jan. so they have a view into Feb. when they announce. My theory is that consumers were willing to spend over the holidays but are going to remain frugal after the holidays. I'll be interested in seeing the industry retail sales numbers for February.

  • Report this Comment On February 24, 2010, at 2:49 PM, insidermanP3 wrote:

    Better service/staffing recently? Reduced prices? Have you guys been to a Walmart lately, you've got to be kidding me! I've gotten such poor service I had to ask someone, "where's all the help", the response: "they've eliminated most of the department lead people and workers all over the store"

    As for lower prices, even in the Walmart report that came out the showed a margin of 26.3 vrs 24.8 last year, but if the numbers are irrelevant to you, just go shopping, holy smokes, some stuff they have doubled in price! No wonder COSTCO and even target smoked them on sales and profits! And by the way COMP sales aren't really fudgeable, where as profits can be "paper adjusted" easily, notice the reduced tax rate of 10 cents per share, did corporate tax rates go down? No they used the old accounting trick to show a higher paper profit to wall street, just by raising prices prior to the end of the quarter! Actual profits at WMT were probably just about the same as the comps!

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