Why Wal-Mart May Never Be Great Again

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Wal-martThere's more to shopping than low prices.

Wal-Mart (WMT) posted financial results Tuesday morning that aren't as encouraging as they may seem at first glance. Yes, net sales rose nearly 6%, to $108.6 billion, but that was fueled largely by a 10% increase at its Sam's Club warehouse clubs and a currency translation-padded 16% spike overseas. Sales at Wal-Mart's namesake domestic stores clocked in nearly flat.

Earnings per share from continuing operations did spike 12% to $1.09, but that also needs some clearing up. Aggressive share buybacks and a lower effective tax rate are forging the illusion that margins are expanding. In reality, pre-tax profits from continuing operations rose by less than 2%.

Investors may be somewhat relieved -- if not outright pleased -- by the report, but I'm not. Same-store sales at Wal-Mart locations across the United States fell by 0.9%. It's the ninth quarter in the row of cascading comps at the world's largest retailer.

What's Doing in the Discounter

There may be a thousand ways to make a Wal-Mart greeter cry, but all you need are three trends working against the meandering discounter to do it in.

Wal-Mart is losing shoppers. It's falling behind in the digital revolution. There are too many people out there relishing its failures, and it will become a self-fulfilling prophecy if Wal-Mart doesn't wake up and reposition itself properly.

1. Stressed-out consumers
The most popular theory behind Wal-Mart's decline is that the same folks who traded down to Wal-Mart during the darkest recessionary stretches in late 2008 and early 2009 are now simply trading back up to more "chic cheap" discounters or traditional department stores.

Wal-Mart is now leaning on its longtime customers, and that's a dicey proposition when economic uncertainty and sky-high unemployment rates are thinning out what little discretionary income they previously had.

The trend is real, but it doesn't explain away all of Wal-Mart's problems. After all, are we to assume that same-store sales will spike higher if we do swan dive back into a recession, the way some economists now believe?

I'm not buying it, because there are two other trends -- digital migration and percolating anti-Wal-Mart sentiment -- eating away at a potential turnaround in a more permanent way.


2. Weak navigation of the digital divide
Some folks don't want to be seen at a Wal-Mart; apparently a lot of people don't want to be seen at walmart.com, either.
Wal-Mart announced a major organizational restructuring of its online operations late last week. Things clearly aren't going too well in cyberspace, even though Wal-Mart's penchant for low prices should sell well when shoppers don't have to navigate through massive parking lots and cavernous superstores to shave a few pennies at the slow-moving register.

Trade publication Internet Retailer reports that Wal-Mart -- despite being the world's highest-grossing retailer -- is lagging behind several bricks-and-mortar chains, including office supply specialists Staples (SPLS) and Office Depot (ODP), in e-commerce.

Wal-Mart isn't doing itself any favors on that front. After eight years of selling music downloads, walmart.com is shutting down its MP3 store later this month.

I'm stumped on that one. The digital convergence of traditional media is here. Folks are downloading music, movies, games, and novels, and it's eating into the physical sale of CDs, DVDs, video games, and books. Why would Wal-Mart turn its back on the one musical format that's growing while its stores continue to stock cobweb-collecting Justin Bieber CDs?

Even if it was being schooled by Apple's (AAPL) iTunes Music Store, how will Wal-Mart ever become an online retailing force when its digital offerings are about to become woefully incomplete?

Another example of Wal-Mart's digital missteps came five years ago when walmart.com tried to cash in on the percolating social-networking craze by launching the School Your Way hub.

Wal-Mart naively figured that image-conscious teens would want to hang out on a restrictive, whitewashed community site revolving around Wal-Mart product wish lists ahead of the back-to-school shopping season. It was a disaster, and Wal-Mart shut it down just two months later.

Every time Wal-Mart tries to do something trendy -- along the lines of selling Internet access or renting mail-delivered DVDs -- it winds up falling on its face.

3. The haters
Walmart hateLastly, a lot of people want to see Wal-Mart fail. They hate the way the corporate behemoth shakes out the mom-and-pop operators. I'm not that spiteful. I can actually appreciate Wal-Mart's frenetic inventory turns that create the opportunity for low and honest markups on items. If folks save money at Wal-Mart, the money saved will likely work its way back into the community by being spent locally.

Wal-Mart has never had a problem getting its value message out there. Folks just don't care. It was selling MP3s for less than iTunes, but apparently that didn't matter to earbud-donning e-shoppers. Target (TGT) gets slapped with the "cheap chic" label, but it wears it with pride.

Post "I'm going to Target" on Facebook and favorable responses will trickle in. When's the last time you saw someone bragging about going to Wal-Mart through Facebook or Twitter?

The closest thing Wal-Mart had to being cool was in 2008 when it put out exclusive The Eagles and AC/DC CDs. It could have aimed younger -- or at least more timely -- but at least it was able to get recording legends to commit to the discounter.

These days, the sound of Wal-Mart is a more ominous tune.

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Longtime Motley Fool contributor Rick Munarriz does not owns shares in any of the stocks in this article. The Motley Fool owns shares of Wal-Mart Stores and Apple. Motley Fool newsletter services have recommended buying shares of Wal-Mart Stores, Apple, and Staples.


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grindad2

If Walmart is "done" why does their stock go up in this great depression?

August 20 2011 at 11:22 AM Report abuse rate up rate down Reply
1 reply to grindad2's comment
Terry Smith

Their stock goes up because Walmart is spending $15 billion dollars to buy back stock. They spent $12.9 billion last year. The company is stocking away money like never before, because they have gotten rid of most full time positions, the benefits that go with them, profit sharing and a lot of employees that were earning over $7.50 an hour. A lot of the people you will find campaigning against them, are former employees.

August 21 2011 at 12:19 PM Report abuse rate up rate down Reply
1 reply to Terry Smith's comment
Steven Mackey

Billions in cash is king.

August 21 2011 at 7:35 PM Report abuse rate up rate down
BoBo the Monkey

For me, Walmart will never be great again because of one simple fact. I used to feel good when I went in there. Saving money, buying American (in Sam Walton's day), seeing friends. But now the prices are only slightly cheaper, if at all. The quality of the merchandise is not very good. And the people I see are too frustrated by the long wait in lines to be friendly. Now, as I leave the store, I feel a knot in my stomach. So glad to be out of there, I breathe a sigh of relief. I only hope that when I get home, all the stuff I bought is actually in the bags. They seem to get annoyed when I check the bag carousel to be sure I have all my stuff, but too many times one(or more) of the things I paid for is not there when I get home.

August 20 2011 at 10:34 AM Report abuse rate up rate down Reply
John Smith

It hasn't been Wal-Mart since Sam died. His buy American mantra got tossed the moment they put his casket into the ground.

August 18 2011 at 11:29 PM Report abuse +1 rate up rate down Reply
onerram

Wal Mart should be named "MADE IN CHINA" .

August 18 2011 at 10:25 PM Report abuse +1 rate up rate down Reply
1 reply to onerram's comment
Steven Mackey

We would have millions of companies named the same thing.

August 21 2011 at 7:36 PM Report abuse rate up rate down Reply
Lance Ferguson

'If folks save money at Wal-Mart, the money saved will likely work its way back into the community by being spent locally."

There's a problem with this idea. The inevitable destruction of small local businesses means that profits go to Arkansas. That's why so many of the very richest Americans are named Walton.

Also concur that other than big ticket items are often cheap knockoffs of similar items in other stores. i found in retail that some shop by price only oblivious to quality differences in seemingly identical products. Everybody's shafting you on some things and it's made Walmart even richer.

August 18 2011 at 9:49 PM Report abuse +2 rate up rate down Reply
Diana Wolf

OOPS- went over my 3000 characters.

The garbage sold at Wal-Mart will fall apart and need replacing in a year or two. Yet another way to keep poor people poor. Keep letting them know how much they must have this thing or that tp measure up, provide them with cheap crappy substitutes which are manufactured with planned obselescence (sp) in mind for the quality goods they are told they should want to be worthwhile. Plus the glut of products that you are faced with/distracted by. I mean it's only 2 bucks- or 3 bucks- but when you get to the register you've so often wound up spending a hell of a lot more than you planned to. Lord have mercy-

I wonder if the poor and the middle class that lived in "real" towns were better off, if they actually spent less money- by percentage- than they do now from pre Wal-Mart-(and "the mall") times, when people could go downtown for what they needed. They could go to the bakery, the greengrocer, the butcher, stop at the cafe or diner for a piece of pie and cup of coffee and a chat. Or maybe, while picking up the needles and thread, socks, fabric, toys for the kids or whatever little thing might be needed a woman or kid runs into a friend at the 5 and 10 cent store (are there "cent" characters on keyboards? ) and chat a while maybe at the lunch counter. Walking or taking a short bus ride to a local doctor or dentist and the pharmacist was a plus. And the family going to a local movie without having to drive (and seeing it on a BIG screen) was a plus. Then there is the big trip to the city for some things not found in town, seeing a show etc.
Lord, I must be getting old- I'm not saying that everyone was living in heaven with no problems but I think it would be an interesting study to see the financial differences- (don't forget a lot of those people who wound up having to close up shop wound up having to work at Wal-Mart or some other low paying job) and the level of mental health/anxiety issues along with the satisfaction with the doing, the "stuff" of daily life.

I have always preferred a town and miss living like that. I do live in a town but everything you need you still have to drive or take a bus- (if you're lucky enough to live where you can find one going where you are and often enough.) The gentrification that happens in these towns wind up with restaurants, boutiques and other "hip" places, very seldom does the town attract the shops that provide the necessities. And if you notice- those hip shops often wind up closing and another takes its place hoping to make it in the gentrified area. I live where it keeps "coming back" we are told. There is one street- a few blocks that has become the town center. It's filled with restaurants (mostly high end) home design and clothing boutiques, antiques- you get the idea. $4.00 ice cream cones and $5.00 coffees. Tourist traps and galleries pop up and leave. The luxury condos that were built remain mostly empty. oh well. that's my 2 cents.

August 18 2011 at 7:30 PM Report abuse rate up rate down Reply
Diana Wolf

More than 15 years ago my mother refused to go to Wal-Mart when she found out that their long range plans meant to have a store every 15 miles thus putting lots of mom and pop stores out of business. This has caused downtown shopping areas, the heart of so many towns, villages and small cities, have become a thing of the past in many communities around the country. You can walk around almost any "small town America" community and see empty stores, service shops like beauty parlors, barbers, copy shops, restaurants- often more shops out of business than in.

Maybe we can't entirely blame Wal-Mart but their planning along with their employment practices which includes unequal pay for women, hiring predominantly part time so they can avoid providing benefits for their employees- often giving them the hours right up to the FT limit and penalizing those that need to take less hours so they can get another miserable PT job. They also "blackmail" the wholesalers/sales people- the middlemen between the manufacturers and the store, threatening them with pulling accounts if they don't sell them the products for less. This cuts into the profit for those people sometimes to the point of almost nothing. Not only does this affect the wholesalers and sales reps but the competition has to pay more so has to sell higher. keeps the They also will have a "special" that undersells any competition that is in the area, even if they lose money on the so called "sale" which is only meant to undermine the viability of the competition. I guess that is the American style of competition these days- cut everybody else's throat so we can own everything. Plus, when you really look at the prices on the items that aren't on sale or marked with slashed prices you often see items that are actually more expensive. They have great brainwashing- er-um- I mean PR.

Add to that their building and maintaining whole towns in China that service Wal-Mart from manufacturing to shipping- more jobs Americans could and should have. At least some of them. Is it any wonder that some people think that Wal-Mart is "evil?"
How much profit do you need? How much disdain can you have for those who keep you in business?

I don't know what the income gap is between the highest paid to the lowest but I would guess it wouldn't be something to be proud of. Maybe the man who started Costco should open a chain... He has the right idea at least in the way employees are treated. (They, along with all the membership retailers aren't always "a good buy" either.)

Again, they aren't the only ones to blame but they are the worst. And the people who flocked there and continue to certainly have some responsibility. Of course people need convenience and as the gap grows between the rich and the rest of us we need affordable. For me that means thrift shops, flea markets, garage sales, free-cycle, craigslist and even the trash! The garbage at Wal-Mart will fall apart in a year or two and then has to be replac

August 18 2011 at 6:41 PM Report abuse +1 rate up rate down Reply
sthomp5743

Walmarts woes aside we as a country need to start buying product made exclusively in this country and let the chips fall where they will

August 18 2011 at 6:37 PM Report abuse +1 rate up rate down Reply
Heavenglows1

People need to remember that so many stores close down this year all across America, it is a wonder that Wal-Mart broke even with unemployment for the different minorities groups are 7.9% to 19% for black men. People are not working across America; the media acts like America went to work or something. I get so tired of people hating Wal-Mart. If you want to shop at Target so you can call yourself “cheap chic” then do so. The woman talking about the candy bar for .50cent, I have seen a .50cent candy bar in no store in the last five years. I normal pay a 1.00 or a 1.50 for a candy bar, so .74cents is a steal. It is just like a lot of American people and the media to kick a business when they are down. Business shutting down all around you like humpty dumpy falling off the wall. If Walmart shuts down the America would starve, you think I am joking, I know, but remember I told you so. Also, remember where you buy your food when this more businesses start to shut down after the next election, it won’t be long now. You are going to be saying Walmart saved the world from starving. Having a flat year is good in any business. Flat or not they are still number “ONE,” what other business gross 409Billion dollars last year. The media said in the US, but Walmart still made a global profit of 409Billion dollars. Let the 409Billion go away and see who has to pay it. I know this cause I am doing a paper on them. I can’t believe that people complain about the price of a candy bar I guess if the 409Billion helped the US be flat I like it like that. They didn’t tell you about the 2.1 million people that work for Walmart, let that go away and see what happens in America. I just 409Billion means they ruined the business, wow people are something else.

August 18 2011 at 5:15 PM Report abuse -1 rate up rate down Reply
mobeck

I've found the Target shopping women have rounder, fuller breasts and are a tad slimmer and better styled than the Wal-Mart spandex cows. Just my opinion.

August 18 2011 at 5:07 PM Report abuse +1 rate up rate down Reply