April Ain't Cruel for Wal-Mart [News] May 4, 2000

April Ain't Cruel for Wal-Mart

By Richard McCaffery (TMF Gibson)
May 4, 2000

A day after a Goldman Sachs analyst downgraded a list of big-name retail stocks, including discount giant Wal-Mart (NYSE: WMT), the Bentonville, Arkansas company posted a 28% jump in April sales.

The cold weather that put the squeeze on Easter sales for many retailers, especially apparel companies, didn't prevent Wal-Mart from reporting sales that jumped to $14.1 billion from $11 billion a year ago. Comparable-store sales for April jumped 10.9%, thanks in part to an easy comparison from last year. Sales for the 13-week period ended April 28 jumped 24%, though comparable store sales didn't fare as well. Comps rang in at 6.6% this year down from 8.9% last year.

Now, the Goldman Sachs analyst took Wal-Mart off the 'recommend' list and placed it in the 'market outperform' category because of macroeconomic indicators -- not problems at Wal-Mart. George Strachan, the analyst, is still bullish on the company. It's just that consumer spending has been growing 5% for the last two years and isn't sustainable, he said. He also looks at indicators including housing turnover, installment credit extensions, and other measures.

That's good stuff, I'm sure, but the average Fool could have told you Wal-Mart's recent performance probably isn't sustainable by reading the annual report. The company's management pretty much said so. Even though the retailer's shares are down roughly 25% this year, its shares jumped 70%, 106%, and 73% over the last three years. Sales are up 40% since 1997, which is pretty amazing for a company with $165 billion in revenues, and net income is up 52%.

Investors thinking that kind of price performance is sustainable need to sell their stocks and start playing Baccarat.

Basically, Fools avoid worrying about short-term performance and macroeconomic issues by holding shares for the long haul. The performance of Wal-Mart's stock over the next three years is a lot less important than how the business performs over the same period since the company has critical issues to address: generating a profit from properties in Germany, boosting Latin American sales, sustaining growth at existing stores while adding more than 200 new units this year alone, and fine tuning its latest growth concept, Neighborhood Markets, which puts Wal-Mart convenience-style stores close to consumers' homes. If management watches over the franchise the stock price will take care of itself, regardless the status of installment credit extensions.

One area worth looking at closely is the company's growth plans. The expansion plan outlined in the annual report is actually surprising, not that it's news, but that management is confident 60% to 70% of sales and earnings growth over the next five years will come from domestic Wal-Mart stores, supercenters, Sam's Club's, and McLane stores. That's not an easy trick considering 86% of the company's $165 billion in sales last year came from domestic properties.

How's it going to happen? Wal-Mart will add 165 supercenters this year -- stores that combine the traditional Wal-Mart format with full-size grocery stores. About 100 of the new supercenters will come from expansions of traditional stores or relocations. Wal-Mart officials have said the company generates a 20% to 40% increase in core business -- which excludes food -- by expanding to the supercenter concept or relocating stores, according to Investment firm Buckingham Research.

That's very nice incremental revenue from the same base of merchandise. It points to two things. First, by getting customers into stores more often (by selling groceries) people buy a lot more standard Wal-Mart fare. Second, the company's getting better and smarter at placing properties.

These are the kind of issues investors should spend time thinking about, not Goldman Sach's recommended list. Also check out Fool John Del Vecchio's recent Wal-Mart research report.

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