Wal-Mart's Big Problem Isn't Fixed

Wal-Mart (NYSE: WMT  ) shares were on an upward trajectory today after it reported second-quarter results, but many investors appear to be ignoring the fact that one of the discount giant's major recurring problems -- flagging U.S. same-store sales -- still isn't showing signs of improvement.

Second-quarter income from continuing operations increased 5.7%, to $3.8 billion, or $1.09 per share. Total sales increased 5.5%, to $108.6 billion, including a currency exchange-rate benefit of $2.3 billion.

Total U.S. same-store sales were flat; Wal-Mart's warehouse discounter, Sam's Club, showed strength with its 5% increase in comps. However, Wal-Mart's U.S. comps decreased by 0.9%, marking the ninth consecutive quarterly decrease in the metric. As was the case last quarter, this part of Wal-Mart's engine is still stalled out.

In another parallel to last quarter's tidings, Wal-Mart's international sales provided a bright spot, increasing 16.2%, to $30.1 billion.

Another recurring theme is Wal-Mart's cautionary tidings about lower-income American consumers. The pressures these consumers face, given high levels of unemployment, have proved to be a drag on Wal-Mart's U.S. sales as customers lighten their shopping carts. They've probably also driven the most budget-conscious shoppers through the doors of even cheaper retail rivals, such as Dollar General (NYSE: DG  ) and Family Dollar (NYSE: FDO  ) .

Wal-Mart still needs to try to find customers from somewhere to boost its U.S. sales; that's easier said than done, since higher-income consumers are probably still more strongly drawn to discounters such as Target (NYSE: TGT  ) and Costco (Nasdaq: COST  ) .

It's not all bad news at Wal-Mart, but the news isn't that good until it gets U.S. sales on a stronger footing again. As much as the international sales growth is heartening, investors should avoid the shares until Wal-Mart shows more signs of strength on its home turf.     

Alyce Lomax owns no shares of any of the companies mentioned. The Motley Fool owns shares of Costco and Wal-Mart. Motley Fool newsletter services have recommended buying shares of Wal-Mart and Costco and creating a diagonal call position in Wal-Mart. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On August 16, 2011, at 10:52 PM, iamnik77 wrote:

    If I ran Walmart I would fix my USA sales by getting righteous. That’s right, I would get righteous. Employees at the bottom few levels would get a bump in pay and benefits. I would also stop trying to squeeze them for every last drop of productivity and simply aim for whatever productivity can be reasonably expected. And I would give a small boost to staffing levels. This would help customers not feel like they just stepped in to a slave labor sweat shop because maybe then a few of the employees would look like they are happy to be there. It would also result in cleaner looking stores and shorter lines for customers. I would stop the depletion of value on my shelves by either slashing prices on Great Value items or replacing them with attractive alternatives so customers would feel like they have choices. Smart people want to feel respected and Walmart doesn’t respect its shoppers. Hence Walmart is only drawing one segment of the population. But respect can’t be faked. It is shown by action. The idiots who manage this company unfortunately aren’t going to do these things. They have pursued cost cuts and retail shenanigans that are aggressively flawed at the expense of the company’s reputation and long term prosperity. Like so many companies Walmart has reached its arrogant stage. Do not for a second believe that this is a blue chip stock. This company years from now will be the poster child for a value trap investment. It will always have a below market PE going forward. When a company has years to right its wrongs and doesn’t that means it isn’t going to change! Large ships turn slow but they don’t turn that slow folks! Wake up and smell the coffee! This ship isn’t turning.

  • Report this Comment On August 17, 2011, at 6:53 AM, oraanderson wrote:

    The period included the crucial back-to-school shopping season, second only to Christmas in terms of importance to retailers. http://bit.ly/rpu2DK

  • Report this Comment On August 17, 2011, at 11:06 AM, financeguy85 wrote:

    Alyce,

    You present some valid points, but I think your end decision to avoid shares of WMT is irrational. Yes, U.S. sales are stagnant. But as far as I can tell, that's not news for any large multi-national blue chip. I would wager most Dow components aren't seeing robust U.S. sales growth, for the reasons you mention--unemployment, credit constraints, a down housing market, etc. Instead, they're getting the vast majority of their growth from international operations. Wal-Mart still gives you a great yield, nearing 3 percent with outstanding dividend growth. Add in a trailing P/E under 12, and this one is a definite buy.

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