Novice Investing - Walmart Hits A Wall

Date: Monday 01st 2008f December 2008 03:35:01 PM

Walmart Hits A Wall - 10/17/2006

By: Novice Investing Staff

There is no question who the biggest retailer in the world is. Despite having its own share of problems overseas, Walmart has its biggest sales in the US. Wal-Mart Stores Inc. (WMT) get the reputation of providing the lowest price for consumers with its 'everyday low price' motto. Wal-Mart quest to provide the lowest price is admirable. It started by providing low markup for consumers. In the end, lower markup stimulates sales which in turn prop up profit.

Then, once it gets larger, Wal-Mart has the leverage to order in bulk and cut its purchasing cost even further. In 2005, Wal-Mart recorded $ 315 Billion in sales!! When you are a $ 300 Billion juggernaut, you need an additional $ 30 Billion more to grow revenue by 10%. Obviously, it is harder to do so in the long run. Wal-Mart stocks seem to reflect these issues, trading at a reduced PE year by year. A lower P/E generally means that investors expect lower growth ahead.

Wal-Mart management are well aware of this trend and they are trying hard for growth, especially overseas. They are mostly uncharted territory for Wal-Mart, owing its success to the US retail market. The fastest way to establish presence is to buy existing companies but that is full of risk. Thus, Wal-Mart faces a dilemma. On one hand, it needs to ring up profits. On the other hand, finding a $ 30 Billion additional revenue each year is not easy. How about cutting cost? Ssshh. Don't ever say that to the world's most efficient retailer. While the six-sigma concepts indicate that we can always find a never-ending improvement, cutting cost at Wal-Mart will include means such as sacrificing its own employees.

Is that right? That, we didn't know. But on October 16th 2006, one Wal-Mart store in Florida staged a protest aimed at the company's management for squeezing its front-end employees out. Notorious things such as forcing employees to work through lunch break, getting different working hours each week, to a reduction in working hours from 40 to 32 hours a week. (Since they are paid hourly, this is a big blow to Wal-Mart employees' income).

Is this the peak for Wal-Mart? If this store protest turns into a national problem, then Wal-Mart stock is at its peak. Wal-Mart is already well-known for not allowing its worker to unionize. One store in Canada was shut down after its workers decide to unionize. Thus, Wal-Mart public image cannot be said to be clean. Wal-Mart shareholders is at a dilemma as well. Allowing workers to get more freedom and higher pay will mean lower profit ahead. On the other hand, if Wal-Mart public image gets badly scarred, customers will prefer to shop elsewhere. Either way, Wal-Mart profit growth will be under a lot of threat. Recent price of Wal-Mart is $ 48.32 with a forward P/E of 17. For a company that will show modest growth and possibly tarnished public image, this is not a good price to buy. If you want to invest in Wal-Mart stock, now is not the time. Patience is virtue.

END

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Wal-Mart Stores Inc. (WMT) or any other securities.

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