Wal-Mart (NYSE:WMT) is the company that Americans have such a remarkable love-hate relationship with. Here's a company that the small, local merchants can't compete with and which leaves a gigantic "asphalt and concrete footprint" wherever it goes. Yet Americans love bargains and they love to stretch their dollars, so WMT is usually on their "to-go" list.
Forbes.com recently wrote an article entitled "Does Walmart Really Erode Our Values? by Art Carden. I love how the article starts off and how poetically it introduces this sensitive subject:
"Do we sacrifice our values at the altar of commerce?
"The poet William Wordsworth once said, "In getting and spending, we lay waste our powers." In this time of economic crisis, some people are re-evaluating capitalism as an economic system, suggesting that we need to recognize the tradeoff between materialism and higher values. I'm very sympathetic to the idea that non-material values are important, but does capitalism really crowd out these values? Does it truly erode our ethics?
"To answer these questions, perhaps we should examine the social impact of one of the iconic--and controversial--symbols of American capitalism: Walmart."
But we investors like Walmart's operating margins, its $23 billion of operating cash flow and its over $10 billion of levered free cash flow from which it can pay its 2% dividend and keep opening new stores all over the planet.
The tough consumer environment clearly is having an effect on retailers, who have largely struggled through this deep recession. At the expense of profits, most have cut prices to keep up sales volumes; job cuts and inventory reductions have helped support profit margins, but there is no getting around the dismal environment. On the other hand, some retailers have held their own, and surely Walmart is one of the shining stars.
The company reported net income of $3.44 billion during the second quarter, or 88 cents a share. The profits outpaced expectations of 86 cents a share, which would have been the same profit the company reported in the year-earlier period. Sales were down 1.4 percent to $100.9 billion due to the stronger dollar hurting the value of overseas revenues. The currency fluctuations also hurt profits by about 4 cents a share, while inventory reductions of almost 6 percent helped during the quarter.
Sales were also weakened by food deflation. Grocery sales, a non-discretionary offering, have become more important to the overall company, as the higher-end items, like flat panel TVs, haven't been exactly flying off the shelves.
Food and consumer staples have made up for the loss of high-end revenues, as Wal-Mart boasts better than 25 percent market share in the U.S. supermarket industry. Regardless of near-term pricing weakness, we expect grocery items to eventually track higher with inflation, helping non-discretionary sales. Discretionary sales will pick up as the employment and consumer spending environment strengthens, especially because Wal-Mart remains a price leader in the category.
Looking forward, the company raised the low-end of its full-year earnings guidance, which now is expected to be $3.50 to $3.60 per share. Shares are trading at 14.55 times the midpoint of this range, providing compelling value given earnings growth estimates of 12 percent. Shares also yield 2.1 percent, providing a nice bonus to their capital appreciation potential.
Wal-Mart sports a 5-year dividend growth average rate of 20%, with 31 years of uninterrupted dividend grouwth and a free cash-flow yield of around 4%. It's not one of the biggest stock buy-back of the mighty DJIA 30 companies, but it seems to do so regularly.
So, I think I'll put in an order to buy some shares at around $50.75 the next time it takes a dip. After all, I'm earning next to nothing in the money market account, and there seems to be little evidence that Americans and other earthlings will be doing less buying there and more buying at say,
Target (NYSE:
TGT) or at
Sears (Nasdaq:
SHLD).
No sir, I'll place my bet with WMT over those two laggards any day of the week, as long as I don't have to pay too much per share. The more controversy WMT is embroiled in, the more they are in the minds and consciousness of people everywhere, and the more shoppers will stop there, and in their ambivalence, shop, and shop and shop.
