Monday, April 23, 2007

Wall Street on Wal-Mart

Friday's Wall Street Journal ran a piece in their Money & Inveseting section on what ails wal-mart, and how to fix it. Trouble is, they mostly asked a group of money managers. Why they think those guys would have a lock on such knowledge is beyond me.

In my opinion, most of them are barking up the wrong tree. Wal-Mart isn't 'coming back' as they knew it. It's big, sluggish, and hard to manage with its saturated markets.
A look at the Yahoo-sourced chart above ( please click on it to view a larger version) displays the firm's stock price over the past five years. To call it 'stalled' would be kind. It's in deep trouble.

Among the suggestions from the analysts and portfolio managers were: improve customer service; focus on same-store sales, not new growth; exit Japan; enter another foreign market like Mexico, and; sell the Sam's Club operation.

It's quite a mix of advice, but I doubt most of it will result in consistently superior returns for Wal-Mart, like its heyday in the 1980s and '90s.

From what I've read of the firm's travails of the past few years, customer service, per se, is not the problem. Certainly not of the sort that matters to McDonalds. It's a totally different customer satisfaction model.

Rather, Wal-Mart is likely at a crossroads. If it desires to regain consistently superior total return performance via growth, then it needs to do a better job identifying those markets which will sustain its traditional, logistics-dependent strategy for dominating the low end of retail merchandising. Whether this means staying or leaving Japan, I don't know. But Wal-Mart's management should.

Similarly, selling or keeping Sam's Club is strictly a matter of whether it contributes to high-margin, high-revenue growth, or not.

However, what all of these observers miss is that real companies become senescent. Eventually, investor expectations become adjusted to their performance, their competitive environment brings the firm to parity, and, like Wal-Mart, it may even draw the focus and ire of public interest and governmental groups, further burdening the firm's efforts to outperform the market.

My own view is that it's unlikely that Wal-Mart will regain its former consistently superior outperformance record. Its size, need to be in multiple countries and exposed to radically varying cultures and logistics environments probably presents the firm's management with too many challenges to overcome simultaneously.

But, since I'm neither a broker, nor a current investor in Wal-Mart, I don't have a stake in convincing others to either buy, or sell the firm's stock based upon expectations. I'm just writing what I have observed, from both my proprietary research, track record of portfolio selections, and the recent media coverage of Wal-Mart's performance.

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