As you might already know, Ashton Kutcher has gone into attack mode on Wal-Mart (WMT +0.81%). The Twitter feud that ensued was memorable. The question now is whether or not Ashton Kutcher made valid points or not, and if this well-publicized feud is likely to lead to any changes for Wal-Mart, which would then, in turn, likely impact investors.
Paraphrasing the Twitter feud
Once Kutcher got wind of Wal-Mart running an employee-to-employee food charity collection in Ohio, he fired the first shot, asking Wal-Mart via Twitter if its profit margin is so important that it can't pay its employees enough to be above the poverty line.
Kutcher might have a valid point, but he's wise enough to know that he's fighting a losing battle, well aware that the first priority is shareholders. Since Kutcher brought up profit margin, let's take a look at how the company is performing in that regard over the past five years:
WMT Profit Margin (TTM) data by YCharts
As a big-box discount retailer, Wal-Mart doesn't sport a high profit margin. It relies primarily on volume, which means it must keep costs low in order to keep its profit margin healthy. This, in turn, helps drive the bottom line, which is what investors want to see.
In my opinion, Wal-Mart made a mistake by responding to Kutcher. Without a response, there's nothing for people to talk about. However, what's done is done.
Wal-Mart replied by stating that the food charity was an act of kindness that was being taken out of context. In Wal-Mart's defense, it did just promote 350 associates as a surprise gesture, and it plans on promoting 25,000 between this month and the end of January 2014.
Kutcher replied with the now-memorable tweet: "You should be proud of your associates but I'm not sure if they should be proud of you."
By this point, you're either hating Wal-Mart or Kutcher. To be fair to both sides, it should now be pointed out that Kutcher has given to at least 14 charities, and that he donated $100,000 to fight malaria in 2009.
If you're in the anti-Kutcher camp, then you can point to his $140 million net worth and $800,000 salary per episode. I don't know what percentage of his income goes to charity. This is difficult information to find. If you find the answer, please post it in the comments below. If it's proven that he donates at least a small portion of his income to charity, then more points to him.
Wal-Mart's retort was a video on "Opportunities & Benefits at Wal-Mart," followed by Wal-Mart stating that it would love to talk to Kutcher more about opportunities.
Kutcher then stated that Wal-Mart had $17 billion in profit last year. What he probably knows, yet doesn't want to state, is that it's all about direction for public companies. This is especially the case for a mature company like Wal-Mart. Without growth, investors lose interest, and Wal-Mart is no longer Wal-Mart.
The average full-time pay for a Wal-Mart employee is $12.83/hour. Wal-Mart bought back 7.6 billion worth of shares in 2012. It has been estimated that if this money was put toward the company's employees, it would lead to $6 raises across the board. That's great in theory, but this wouldn't help Wal-Mart reduce its share count and grow its bottom line. Without that bottom-line growth, investors would head for the exits. The cold-hard truth is that Wal-Mart reflects capitalism. Without capitalism, investors would have no way to grow their net worths, and Ashton Kutcher wouldn't be worth $140 million.
If you would prefer to invest in a similar company that pays its employees more money, without sacrificing growth potential, then another option exists.
More pay and growth for Costco and PriceSmart
Before we get to the details, first take a look at the top-line performances for Wal-Mart, Costco (COST +1.82%), and PriceSmart (PSMT +0.63%) over the past five years:
WMT Revenue (TTM) data by YCharts
Wal-Mart has shown decent growth because it offers an extremely broad range of products at very low prices, which then drives hordes of consumers to its stores. Value-conscious consumers had been visiting Wal-Mart and spending a lot of their money. Top-line growth has slowed a little recently, primarily due to a lack of wage growth, a payroll tax increase, and the growing popularity of dollar stores. Wal-Mart looks to combat the latter threat by opening in small-box stores next year.
Costco attracts a higher-end consumer, and high-end consumers are doing well at the moment, which partially relates to stock and real estate price appreciation. However, even if those markets spun out of control, these consumers would still look for bargain prices in what they deem a pleasant atmosphere. While Costco isn't the most resilient company you will find, it does offer some resiliency.
PriceSmart is a discount membership store located in Latin America (high-growth area) and the Caribbean. It owns 32 warehouses in 12 countries, and it looks to expand. I wrote about PriceSmart on October 29, 2013: "A Growth Company You Might Not Know About." In the conclusion, I pointed out that continued growth and stock appreciation was likely, but to be cautious due to a high valuation. That analysis hasn't changed, as PriceSmart currently trades at 34 times forward earnings. This makes PriceSmart more expensive than Costco and Wal-Mart, which trade at 22 and 14 times forward earnings, respectively. Plus, PriceSmart only yields 0.50%, versus Costco's 1.00% and Wal-Mart's 2.40%.
In regard to higher pay, full-time Costco employees average more than $20/hour. This has not affected the company's growth. On the other hand, it's a different business model and environment than Wal-Mart.
The bottom line
Nothing here is likely to change. Wal-Mart should continue to show methodical top-line growth while returning capital to shareholders. Costco and PriceSmart offer more top-line potential. PriceSmart has been growing rapidly, and it's looking to expand. These are big positives, but it's higher risk than Costco given its multiple. Costco seems to be the ideal balance of growth and fair valuation.
