WALMART

There has been a lot of hoopla over Walmart the last two days. Well why not. They had their two day annual meeting giving them a chance to strut their stuff. Let me say at the outset, I didn't listen to their entire webcast of the meeting, so maybe there are some hidden pearls of wisdom I missed. Based on the news and analyst reports I read, I was not impressed. Of course I've been a bear on Walmart for sometime. I also sat out the recent rally from 42 to 52 but was not short. Back to the meeting. They said they were going to slow down new store expansion to a 7% increase in square feet from 8% and cut and plan to keep cap ex equal to their increase in same store sales growth, about 2-4%. This meant an increased focus on profits and their return on invested capital. Wow-wee! The bulls are trying to equate this with McDonalds turnaround of a couple of years ago. They also cut new store opening's to almost zero not a paltry 1% and pushed more of existing and new product through their existing distribution. They increased store hours, started accepting plastic for payment, introduced new products like premium salads and coffee. Walmart is also trying to increase traffic by remodeling stores and hiring a new lead ad agency among others. But they are of course always trying to increase sales and have not been too successful lately. McDonalds was coming off a low base after a couple of horrific years, Walmart is not. McDonalds after going astray had more potential and easier fixes. Adjusting their menu for more mature tastes and staying open longer and accepting credit cards were almost no brainers. They money they saved from stopping new construction they were able to put into huge share buybacks and dividend increases. Walmart plans do not include anything on that scale.

I think Walmart has terrific management. Their problem is the macro environment has just overwhelmed them. They are so large, that it is and will continue to be the largest influence on their performance. One thing you never hear mentioned, is sales growth versus inflation, probably because most retailers have sales at least equal to inflation, otherwise their unit sales would be dropping. So it was with Walmart, in 2000 same store sales were7.7% vs inflation of 2.7%, in the recession year of 2001 the SSS were 5.1% vs inflation of 3.4%. In 2002 inflation dropped to 1.5% and their SSS increased to 6.1%. Inflation was 2.4% in 2003 and their SSS were 5% . In 2004 the inflation dropped to 1.8% and SSS fell to 4%. In 2005, the trouble began, inflation went up to 3.3% and SSS dropped to 3.3%. After inflation they had zero increase in sales. The pattern continued in fiscal 2006. Inflation was 3.5% and SSS increased 3.6%. Only because they have opened new stores equaling about an 8% increase in sq footage that they have been able to show any decent profit growth. That 8% plus 3% SSS have given them the 10-12% total sales growth the last couple of years. No surprise last years EPS growth was 11.2%. It is no wonder they would take a very slow incremental approach to slowing new store growth. Why are they doing it at all? Last year SSS growth actually increased for the first time in 6 years, only marginally 3.6% vs 3.3%, but total sales growth fell nevertheless to 9.9% from 11.2%. They're getting less bang for the buck. Increase new stores by 8% and have total sales growth decline. Secondly, like a lot of companies announcing slowing capex, like Amazon yesterday, they see the slowdown coming and don't have to look any further than their own numbers. Hope the money saved and put into share buybacks can make up the difference.

A final word on gas prices. Walmart, like stocks in general , really took off on the lower gas prices helping their sales. They even said in their webcast that lower gas prices will help them. Yes, if they stay there for 6 months to a year, but a one month drop, even as large as its been, its effect has been over-rated. To prove that point, not widely reported, but they mentioned that SSS in October were only up 1% so far, well below their 2-4% estimate.