Wal-Mart Finally Embraces Its Gritty Image

WalmartGreat selection, low prices, and tolerable shopping conditions are Wal-Mart's (WMT) winning formula. Finally, the company is starting to see it that way, too.

A decade ago, Wal-Mart's stock was overpriced. The company's rich price tag became its penance as it spent the better part of 10 years trying to grow into its valuation of yore. So it made improvements in margins, earnings, and operational returns. Still, the share price barely budged.

Then Wal-Mart did something really stupid: It tried to copy Target (TGT).

If Target Jumped Off a Cliff...

The company pulled thousands of items off its shelves and went trendy and upscale with its threads. And it did this just as the U.S. was entering a recession. Bad move.

A few years and one new CEO later, Wal-Mart began to realize what you knew all along: If people wanted a shopping experience like Target's, they would just go to Target.

Fake It Till You Don't Make It

Learning to embrace your gritty self isn't easy, but Wal-Mart now realizes that it's not just another pretty face in the neighborhood.

You know Wal-Mart. The smell. The crowds. The lines. The world's largest retailer. The nation's largest private employer. You could live in one, and while you might end up looking like a sun-starved creature from an H. G. Wells novel, at least you'd have access to ammo, Corn Flakes, and underwear.

CEO Mike Duke is recluttering shelves and going back to basics. It's a strategy that should start to reverse the company's two-year trend of declining U.S. same-store sales. This alone should boost the stock price. But I see even more reasons that an investment in Wal-Mart right now will pay off down the road:

1. Dividends: Wal-Mart is now a dividend stock yielding nearly 3%, and its payout is up double digits over the past 12 months.

2. International expansion (and online sales): Wal-Mart may have missed in Germany and South Korea, but it's the bomb elsewhere. It's the best operator in the sophisticated U.S. retail market, so it brings serious intellectual reserves when it expands overseas.

3. Valuation: This may be a bit of a catch-all, but it's my favorite single reason for feeling good about Wal-Mart's future. Baking conservative-to-mid-range assumptions into my discounted cash flow model yields a valuation of $65 per share -- high enough to offer a 20% gain to investors who buy today.

What Could Keep Wal-Mart in the Markdown Bin?

The risk is that I'm wrong. Adding more items might not bring the throngs of humanity back into the stores (although they appear to have returned to the one in my neighborhood), and Wal-Mart could get nipped from dollar stores on the low end and Amazon.com (AMZN) on the higher end.

But over the decades, Wal-Mart has demonstrated that it's a superior retail concept. Putting entire towns out of business isn't easy, and whatever you think that says about Wal-Mart, it says a lot less about the towns -- or at least the viability of their retail offerings. I'm not being harsh, just realistic: Business evolves like everything else, so put your money with a winner.

The Bottom Line

Think of Wal-Mart as a bounce-passer and lay-up artist -- the kind of player that puts points in your portfolio while letting the highfliers grab the spotlight. The game is on, investors, and the low price on Wal-Mart's stock won't be around for long.

James Early is a Motley Fool analyst. The Motley Fool owns shares of Wal-Mart and a box of Corn Flakes, but neither ammo nor underwear.


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bassmnsc

You also have your politicians to blame for that when they put the NAFTA agreement throught.Ross Perot an independent at the time of the election he was in said "If you approve the NAFTA agreement all of the factories will go south of the border where they pay 58 cents an hour or it will go out of the country.Big money retailers will go anywhere they can to buy product at a reduced price to increase their margins and therefore increase there profits.Walmart after Sam Walton died has always been a cost controller always looking to save a penny.Problem being they always cut payroll first at the cost of the customer and all their executives are like our politicians are.They are paid alot of money and dont do nothing.They do not share there millions with the very people that put them there.In fact just recently,Mike Duke,Made it harder for the rank and file store associates to get their bonus.Thats loyalty for you.

July 21 2011 at 2:00 PM Report abuse rate up rate down Reply
DWYERNINE

WAL MART HAS MADE OUR COUNTRY A THIRD WORLD COUNTRY. I WOULD NEVER SHOP AT WAL MART AS ALL OF THEIR PRODUCTS ARE MADE OVER SEAS WITH CHILD LABOR AND WORKERS WHO MAKE ONLY A FEW DOLLAR'S A DAY. THE GREED THAT WAL MART HAS MADE ON THE BACK OF THESE POOR PEOPLE WHILE FORCEING MANY FACTORIES TO BE CLOSED IN OUR COUNTRY AND WHILE THEY USE CHEAP LABOR THAT MAKE LARGE PROFITS ARE UNREAL AND SHAMEFULL. I AN MY FAMILY ARE ALL UNION PEOPLE WHO KNOW HOW PEOPLE ARE TREATED AND THE BENFITS THEY HAVE, AND HOW THEY ARE TREATED BY THEIR COMPANIES. WE WOULD NEVER SHOP AT WAL MART OR GO TO THEIR STORES EVEN IF THEY GAVE THEIR GARBAGE AWAY. WE TRY TO STOP WAL MART FROM BUILDING WHERE EVER THEY TRY AS THEY ALSO USE NONUNION WORKERS ON THESE PROJECTS TO MAKE EVEN MORE PROFIT ON THE BACK OF THOSE WHO SHOP THEIR. IT'S TIME FOR OUR COUNTRY TO WAKE UP AND START BUYING (USA MADE PRODUCTS) AND KEEP OUR UNIONS STRONG FROMALL COMPANIES LIKE WAL MART.. GO UNION DWYER FAMILY

July 18 2011 at 5:00 PM Report abuse +1 rate up rate down Reply
thagrus

Do NOT take a walmart survey unless you want your e-mail inbox jammed with spam..

July 18 2011 at 11:19 AM Report abuse +1 rate up rate down Reply
charly32

Go to Google Images and type in People Of Wal Mart and you'll see why I love the place. It's the greatest freak show in the world! Ringling woulda loved it.....

July 17 2011 at 10:49 AM Report abuse +1 rate up rate down Reply
me

So many of you that claim to NOT shop at Walmart must be lying. There are 3 of them in my area within a 20 mile radius. A new one is almost ready to open in "an upscale" community here in the North east. Someone is shopping there or they wouldn't be building these behemoth stores.

July 17 2011 at 8:15 AM Report abuse +3 rate up rate down Reply
1 reply to me's comment
plafrinea

Perhaps many of us reading this article are the ones who do not shop at Walmart. Wouldn't say your assumption that people posting here are lying since the Walmarts in your area are open is based on critical thinking.
However, I do agree that there seems to be an overwhelming number of people who profess to dislike Walmart and yet continue to shop there.

July 17 2011 at 10:57 AM Report abuse +1 rate up rate down Reply
teltech543

There aren't any Wal-Marts worth shopping at in my area. They are all Ghetto-Marts.

July 17 2011 at 7:58 AM Report abuse +2 rate up rate down Reply
cruzecon

I refuse to participate in the destruction of my town or any other to this lustful company that puts more people out of work than it can possibly employ in each area. I always shop somewhere else even if it doesn't sell cheap plastic stuff from china like walmart.

July 17 2011 at 7:58 AM Report abuse +3 rate up rate down Reply
jelans

I can't shop in Walmart, too depressing, bad merchandising and it's like being in a Fellini movie.

July 17 2011 at 6:07 AM Report abuse +2 rate up rate down Reply
JoanneVLavender

Ironically, Target has just started to emulate WalMart by opening a grocery store.

Wally World has stuff that won't stand up to normal usage or wear and tear. Target has slightly better stuff, but it's still overpriced for what it is.

Give up. Find a really good department store, and shop there. Leave the grocery shopping for the grocery stores.

July 17 2011 at 4:06 AM Report abuse +2 rate up rate down Reply
Gumbi

Working for Wal Mart was as close to a concentration camp as I would ever like to be again. Corporate DOES NOT care about their employees and it is a pre requisit to become a member of management. The only thing they care about is the almighty dollar and will do anything to get it.

July 17 2011 at 2:09 AM Report abuse +2 rate up rate down Reply
1 reply to Gumbi's comment
Setanta

ooh please,you sound exactly like the welfare to work garbage that wound up in the marking room /receiving or wrapping departments of a large UPSCALE nonunion store i used to work in. What a crew---"NOW iiiiii know whaaa slaaavery was like" etc etc etc Never occurs to some that a JOB MEANS YOU WILL WORK,acquire skills,$$ and possibly move up their chain and then move on.

July 17 2011 at 8:54 AM Report abuse -2 rate up rate down Reply