When was the last time you saw a company announce a change of strategy that resulted in a $15 billion gain in market capitalization over a two-day period? For me it's been a while, but that's what Wal-Mart
At the once-a-year extravaganza in Fayetteville, Ark., Wal-Mart announced it was reducing its domestic Supercenter growth plans for the next few years. By close of business Monday, the stock had jumped $3.61 per share, more than a 7% gain, pocketing upgrades from four investment firms along the way. With 4.12 billion shares outstanding, that translates into a $14.9 billion increase in market capitalization. Not too shabby for two days' work.
It's also interesting that Rob Walton, chairman of the company, affirmed the Walton family's complete confidence in CEO Lee Scott. No doubt the family is saying "ditto" to that today, as their approximate 40% stake has gained about $6 billion in value since Thursday.
Investors can have confidence, too, as Wal-Mart tailors its plans in favor of growth that makes money.
Capital efficiency
Rule number one for any rational company is to invest only in capital projects that will generate returns higher than the cost of capital. Otherwise the company is just wasting dollars that belong to the shareholders. In this case, Wal-Mart has decided to lower capital expenditures by about $1.5 billion, instead returning the dollars to shareholders in the form of stock buybacks.
That's good news for shareholders because it means the company has not become so bent on growth at any cost that it falls short of investment hurdle rates. We got a clue to this in the press release, where senior Wal-Mart executive John Menzer used the magic words "reducing cannibalization of existing stores" and a "more strategic selection of US real estate projects."
I take this to mean the company isn't changing its ultimate plan for domestic Supercenter saturation, just lengthening the time horizon by being more selective -- and bearing the brunt of less comparable-sales cannibalization along the way. The end goal doesn't change; Wal-Mart is just signaling it will get there in a smarter, more efficient way.
Supermarket stocks on a wild ride
After Friday's euphoria among supermarket competitors, I think this reality sank into the markets on Monday. The stocks of Kroger
Time will tell
This is a meaningful strategy shift for Wal-Mart, but the company has larger problems to solve. The retailer is deeply engaged in improving relevancy to customers, both in merchandise offerings and customer service. Perhaps a "go somewhat slower" approach will buy the company breathing room to solve these larger issues. We'll know if it's working in about 12 to 18 months.
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Motley Fool contributor Timothy M. Otte surveys the retail scene from Dallas. He welcomes comments on his articles, and owns shares of Wal-Mart, but none of the other companies mentioned in this article. The Fool has a disclosure policy.
