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Ben Strubel
Ben Strubel
Articles (109)  | Author's Website |

July’s Buffett-Munger Pick, Wal-Mart, Is Back on Track

December 14, 2011 | About:

In July we recommended Wal-Mart Stores Inc., then trading at approximately $54, in the Buffett-Munger Newsletter. Years earlier Wal-Mart had begun removing many SKUs from the shelves in an effort to make the store appear less cluttered, more upscale, and appeal to higher-income demographics. It was the wrong strategy at the wrong time as Wal-Mart suffered through multiple years of declining same-store sales. The recession forced many people to shop for the cheapest items they could find and Wal-Mart began to lose market share to dollar stores. Wal-Mart management believed that adding back SKUs, particularly the lower-priced items, would be the key to a turnaround. We agreed with management and thought the plan would put Wal-Mart back on track. Thus, we recommended Wal-Mart in the newsletter.

It’s been about six months since the recommendation and so far the plan seems to be working.

At a recent investor conference the Wal-Mart U.S. CEO confirmed that the SKU add-back initiatives were delivering 75 to 100 basis point improvements in sales. He also added that food traffic increased by 100 basis points which was helping other business lines. Wal-Mart’s plan looked like it was working. Today (Dec. 14, 2011) the stock trades at $57.60 and Wal-Mart reported 1.3% same-store sales growth for the past quarter in U.S. Wal-Marts. Grocery, health, wellness and hardlines lead the way with positive comps. The company is still working on improving entertainment comparables. Store traffic decreased but the drop was a 160 basis point improvement over last quarter. The drop in traffic was offset with a higher average ticket price.

Future Initiatives

In addition to continuing with the SKU add back Wal-Mart is looking to reduce SG&A costs. Management has stated their goal is to reduce SG&A costs as a percent of sales by 100 basis points between FY13 and FY17. For a company with a revenue run rate as large as Wal-Mart even a small improvement in SG&A expenses can generate serious cash for shareholders.

Management’s Guidance and Outlook

Management continues to see soft demand in the US. They haven’t seen the environment for their core customer improve but on the other hand they haven’t seen things getting worse. Job security and lack of income continue to be their customer’s biggest worries. This jives with the mainstream economic view that the US is just muddling through the current recession.

The picture in emerging markets seems brighter to management. They are seeing the emergence of a growing middle class that is becoming the core customer of Wal-Mart (or brands owned by Wal-Mart) stores.

For next quarter management expects comparable sales to be flat to up 2% and is predicting EPS slightly higher than last year ($1.42 to $1.48 versus $1.41). Management expects full year EPS to be in the range of $4.45 to $4.51 compared to $4.18 for last year. ROI has slipped slightly from 18.6% to 18.2%.

Wal-Mart’s Holiday Season Strategy

Wal-Mart strategy for driving sales during the holiday includes a Christmas layaway program, a guarantee (“Christmas Price Guarantee”) to match any competitors’ current print ads, introduction of food items such as party trays centered on the holidays, wide assortment of decorations, and ads that reinforce Wal-Mart’s broad product lines. Wal-Mart also intends to make social media advertising a key part of its holiday campaign.

Next Year and Beyond

It seems a foregone conclusion there will be a recession in Europe, growth in the UK is slowing due to austerity measures, and the U.S. is just muddling along with high unemployment and slow growth. Against this dismal backdrop we think Wal-Mart can continue to do well. While a slowing global economy will certainly impact sales, Wal-Mart’s commitment to Everyday Low Prices will certainly be a draw to those with reduced incomes. On the positive side, as management stated emerging market growth continues to be a bright spot and management continues to open new stores internationally.

Another thing investors should keep a careful eye on is gross margins. The rising cost of goods combined with Wal-Mart’s commitment to low prices have reduced gross margins. For example, food costs rose 4% but Wal-Mart chose not to pass most of those costs on. Last quarter gross margins fell by 52 basis points to 24.6%.

Wal-Mart has also been improving its capital expenditure mix. More money is now being spent on opening or expanding new stores rather than more expensive remodels. This means that going forward returns on capital expenditures should be higher than the in the past.

Wal-Mart’s strong international growth, improving comps, and improving capital expenditure mix should offset gross margin declines and a stagnant economy.

Disclosure: No positions

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About the author:

Ben Strubel
Ben is President and Portfolio Manager of Strubel Investment Management LLC, a value-oriented, independent, fee-only Registered Investment Advisor (RIA) based in Lancaster, Pennsylvania.

Visit Ben Strubel's Website

Rating: 3.4/5 (9 votes)


Madmilker - 5 years ago    Report SPAM
Google "irretrievably soured relations"....

"Another port deal: Mexico, China, Wal*Mart "....

"Lev Khasis seeks control over hypermarket chain".....

and why there is a moat around a castle....

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