Wal-Mart Up Against a Stagnant Stock Price

Like a noxious smell to which nobody wants to draw attention, there was a curiously unremarked subtext to the third-quarter earnings release from Wal-Mart Stores last week.

Most news reports quoted its executives sounding upbeat about the coming Christmas season. But none saw fit to mention that investors haven’t made a dime from this company’s shares over the last five years.

Wal-Mart stock peaked just under $67 (adjusted for a split) in December 1999. Since then it has largely traded between the $40s and $50s. If you’ve been a long-term holder, as all the primers on virtuous investing instruct us to be, Wal-Mart has been dead money for you since before the turn of the century.

Now, a stock price mired in the doldrums like a schooner at the equator is not in itself a sign of a faulty business strategy or a rap on management. Plenty of blue-chip stocks are in the same condition, or worse: General Electric, Microsoft, IBM, to choose three at random, have lost wads of money for investors during this period. The last half-decade included a significant recession and a stock market crash, and many stocks have yet to recover.

Moreover, a stock’s price depicts only a moment in time. For all we know, despite flat-lining for years, Wal-Mart shares could start cantering like a stallion at any moment. The company has moved aggressively overseas, where strong growth beckons. Last week its shares enjoyed their first three-day rally since Oct. 10.

Still, this is the largest retailer on Earth, a company that as recently as 2001 was regarded as a widows-and-orphans stock and a retailing juggernaut.

Moreover, its stock market performance has been eclipsed by that of numerous competitors, including some with consistently narrower profit margins. Since mid-November 2001, a period in which Wal-Mart has lost more than 8% of its market value, Costco Wholesale has gained 20%, despite profit

margins as razor-thin as the supermarket industry’s. Target, the big-box store that is most similar to Wal-Mart, if rather more stylish and upscale, is up 54%.

Wal-Mart shares have lagged behind those because, arguably, it faces more severe challenges. Some are financial: After years of boasting a price-earnings multiple handily exceeding the rest of the retailing industry, the company has been cut down to size, an inevitable phenomenon. (The near-doubling of its earnings over the last five years, to about $11 billion, means a parallel cut by nearly half in its P/E multiple.)

More important, Wal-Mart is facing the limits of growth. This derives partially from the law of big numbers: It’s a lot more challenging to grow profits by, say, 5% when the base is $11 billion than when it’s $5.7 billion, which was the company’s net income in 1999.

Founded in 1950, Wal-Mart long ago passed the age of effortless expansion. With 3,100 stores in the U.S., the company is running out of convenient suburban and exurban building sites. As a result, it has started building stores closer together than it used to, which means cannibalizing sales from the old stores. A Wal-Mart executive told the Wall Street Journal that its choice was between having “two $100-million stores or three $80-million stores,” but that’s a dodge. What investors really want is three $100-million stores.

The company’s quandary is reflected in its deteriorating same-store sales -- that is, sales at stores open more than a year, a conventional retailing metric. For the most recent nine months ended Oct. 31, Wal-Mart reported same-store growth in the U.S. of 3.4%. (Target’s figure for the same period was 6.3%.) Wal-Mart’s figures may look brighter than they are -- for its traditional “box” stores the growth figure was only 3.1%, but its Sam’s Club membership stores picked up the slack with 5% growth. The Sam’s Club figures, however, included gasoline sales. Without gasoline, the company says, Sam’s Club sales would have advanced by only 3.5%. Same-store sales growth peaked for Wal-Mart in 1998-99, when it reached 9%.

Meanwhile, the imperative of never-ending expansion has forced the retailer into unfamiliar and inhospitable regions, such as urban centers. Mark Husson, a retail analyst at HSBC Securities, calculates that the company has four times as many supercenters in relation to population in “red” states as in “blue” states. (Husson, who categorized the states according to the vote in the last presidential election, doesn’t personally own Wal-Mart shares, but his firm performs investment and commercial banking services for the company.)

Husson’s analysis betokens bad news and good news: Wal-Mart may be venturing into hostile territory, but there’s a lot of that territory yet to conquer. Still, when a company enters a region where people live close together and therefore have better-established social programs than do rural areas, the effect of its behavior on public policy and community services becomes inescapable. The politicized opposition confronting Wal-Mart’s expansion plans can be caricatured as liberal bleeding hearts taking aim at a big, fat conservative target, but it derives more from a recognition that the company’s impact on existing merchants, wage rates and public services is much more pronounced in the city than the countryside.

This means rising costs for Wal-Mart. Lobbying expenses to counteract attacks on its behavior are rising, land is more dear, and pressure to provide employees with pay and benefits that keep them off the public rolls is more intense. The stock price hasn’t budged because no one is really sure whether Wal-Mart will overcome these challenges as it has others in the past, or whether, like any being or institution approaching its 60s, this one is starting to show its age.