Just last week, fellow Fool Seth Jayson reported that Wal-Mart's
Wal-Mart has lowered its comparable-store forecast for June to a range of 2% to 4% from the previous 4% to 6% estimate. In a recorded message, the company said that its Father's Day sales were "disappointing" and blamed the weather for the decreased demand. Apparently, Wal-Mart believes that the cooler weather caused people to curtail their air-conditioning, pool supply, and lawn and garden purchases.
While the sales shortfall is a significant announcement, the news by itself is not materially damaging. The real bomb waiting to explode on Wal-Mart is the class action lawsuit against the company. If you missed it last week, a federal judge approved a class action lawsuit against Wal-Mart, making it the largest private civil rights case in U.S. history.
The suit alleges that the company's female workers were paid less than their male counterparts and that women were often skipped over for promotions. Six women brought the suit, but the judge decided to open the action to nearly all women that have worked for Wal-Mart since 1998 (a staggering 1.6 million former employees!).
I usually refrain from buying shares of companies involved in lawsuits, and this is no exception. Although Wal-Mart's chief spokesperson said that the company " Strongly disagree[s] with the decision," I'd be worried for it right now if I were a shareholder. Between the legal costs and the potential payout to former employees for back pay, lost wages, and damages, it also appears that Wal-Mart is experiencing weakness in its core retailing business.
Wal-Mart shares, which are trading at 19 times the earnings estimate of $2.72 for 2005, should be seen as risky in light of recent developments. With other attractive fish in the retail sea, such as Target
Costco, eBay, Amazon.com, and Best Buy are all Motley Fool Stock Advisor recommendations. Want to learn more? Subscribe today and receive a six-month money-back guarantee.
Fool contributor Phil Wohl spent more than 12 years on Wall Street and now concentrates his writing on more fictional characters. He has no stake in any firm mentioned above.