There was a lot of negativity in the air this week regarding Walmart. Jefferies & Co. analyst Dan Binder downgraded the company on Tuesday and proceeded to appear on CNBC where he expressed concerns about company specific issues at Walmart regarding turnaround initiatives not gaining traction in the time frame he had hoped for.
On Wednesday, Bloomberg piled on with a story about declining traffic trends that was based on an internal memo from an un-named author. The same day an email pitch from WSL/Strategic Retail hit media outlet inboxes with the following provocative subject line: “Walmart’s reign as price king is over,” according to ‘How America Shops’ report." The consulting firm’s take in the first line of the executive summary was: “The reality is that Walmart will not be what it was any time soon, any maybe never, for lots of reasons. Some long-standing. Some recent.”
These actions coupled with dour economic news, which roiled financial markets and sent the price of gold soaring to new highs, created a perfect storm of negative sentiment. Shares of Walmart suffered along with the broader market and by the end of trading on Thursday were a dime above the 52-week low of $50.
Clearly not a good week for Walmart, but things may not be as bad as they seem or have been made out to be. For starters, Jefferies analyst Binder could just have easily made the same comments about the company’s turnaround efforts last year, the year before or the year before that, so the timing of the call is interesting and of questionable value to the firm’s clients. Shouldn’t long-term oriented investors consider accumulating more shares of Walmart given the compression of the company’s earnings multiple and an even more attractive entry point following this week’s pullback.
As for Bloomberg, the media outlet and current beat reporter covering Walmart have demonstrated a consistent pattern of distorting and misrepresenting information about the company that is as obvious as Fox News’ pro-Republican slant. The decline in customer traffic at Walmart is well-documented and routinely mentioned as a key challenge during investor presentations so the issue isn’t new news. The conclusion that the add-back of 8,500 items isn’t working because traffic hasn’t increased is flawed because it overlooks the reality that regaining lost customers is a lengthy process and Walmart can’t sell more to existing shoppers if they don’t have any money.
The situation with the WSL/Strategic Retail report is a bit different. It is a common practice among consulting firms to issue reports on key retail industry topics to position the firm as a thought leader, showcase research capabilities and generate new business. Releasing a report on Walmart supported by a consumer survey is a pretty effective way of generating considerable exposure for one’s brand even if the data presented doesn’t tell anyone in the retail industry anything they didn’t already know.
This isn’t to suggest there is some truth to what WSL, Bloomberg and Jefferies all said this week, but they are missing the point. Walmart understands the road back is going to be long and slow because restoring an every day low price value proposition is not something that happens over a few quarters, especially when the company’s core shoppers are getting kicked in the teeth by gas prices and a lack of jobs.
Look for the negativity to get worse before it gets better. Second-quarter results are due out later this month and with expectations low that Walmart will see any type of meaningful top line improvement at its U.S. stores there will be a lot of second-guessing out there regarding the company’s strategic direction. Some of it, while well-deserved, fails to understand that EDLP is a marathon and the not the type of strategy designed to yields quick results.
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Excellent, thought-provoking article that sheds some much needed light on "the rest of the story." Balance is sorely lacking in much of today's journalism. You've done the profession proud with the insights from this article. Thank you!
I welcome a lively debate and
I welcome a lively debate and would have enjoyed speaking to you as you prepared your article. In response to it, I would argue that you miss a major point that I was making in our note to clients, which I discuss below.
We had a "Buy" rating on Wal-Mart, reflecting our belief that its turnaround initiatives would work. When I make a stock recommendation, I don't do it hastily, but with a thesis in mind and thorough analysis. Ultimately, I need to see a roadmap to success, which in this case, I would define as a meaningful improvement in profitable comp store sales and a rising stock price. When it appears a thesis has fully played out or just the opposite, when it simply is not working, we change our rating. This exercise is aimed at helping investors make money or avoid losing it. What we don't do, is simply wait around hoping something might change. Hope is not a good investment strategy and is a good way to lose money.
In this case, you questioned my timing and suggest that I could have done the same thing a year ago. This is just flat out wrong! A year ago, I believed certain initiatives being undertaken would yield certain positive results over the course of a year. I have since monitored the company's progress and through our research determined that there could be a negative deviation to expectations as sales potentially fall short of plan. As an analyst, without perfect information, I build a mosaic based on data points my team collects. I am the first to admit that there is room for error. However, I found mounting evidence that suggests that Wal-Mart is not making the progress I would have expected this far into its turnaround efforts. Wal-Mart has added back 90% of the SKUs it previously pulled out and emphasized everyday low price for several quarters, yet it still seems to be struggling. If we are right in our observations, then sales will be at risk and we could see further gross margin erosion as the company seeks to widen the price gap further. Ultimately, these actions could translate to lower earnings and a lower stock price, hence, my decision to lower the rating to Hold from Buy.
Surely, a lousy economy should play well for Wal-Mart or at least that's what the "playbook" suggests. However, with an extended period of high unemployment, one would think Wal-Mart should have been benefitting for the past two years - results suggest otherwise. Investing in this company based on the idea that it may benefit from some larger macro trend sounds appealing and is probably a widely held view, but not one that will necessarily produce great results. Alternatively, an investor looking for safety could find an equally defensive name that is actually taking market share too. That would seem like a more rational starting point to building an investment thesis.
Good luck trading!
Dan Binder