Is Wal-Mart safe in a global downturn?

Author: Tyler Kocon, Split Rock Private Trading

Covestor model: Equity Rotation

Disclosure: Long WMT

For the past several decades, Wal-Mart, Inc. (NYSE: WMT) has been one of the largest names in consumer goods. The company, founded by Sam Walton, began modestly in Arkansas in 1962 and has evolved into one of the most powerful and influential companies on the face of the planet. Despite the ongoing and seemingly endless financial downturn, Wal-Mart has still been able to generate new business and has continued to lead the pack in their industry.

Wal-Mart, Inc. owns and operates 3,805 traditional U.S.-based retail stores and 4,557 international stores composed of minority and majority subsidiaries, as well as several joint ventures (10-K report filed March 30, 2011).

Over the past several years, it appears at first glance that Wal-Mart is losing steam, especially on U.S. soil. Between 2007 and 2011, Wal-Mart has actually experienced a -21.05% growth rate in the number of stores they opened in the United States. The most alarming aspect of this statistic is the fact that between 2009 and 2010, Wal-Mart opened less than half of the stores it had opened in the previous fiscal year. Their growth rate, as measured by the number of stores opened in the United States, from 2009 to 2010 was -51.79%. This number translated to only 54 store openings last year (10-K report filed March 30, 2011).

That’s a far cry from the 192 stores they opened in 2003. It appears that Wal-Mart may have finally saturated the American market. This poses the obvious question: “Is there any way Wal-Mart can continue to grow?”

Wal-Mart’s business shares a commonality with many of America’s largest companies. Wal-Mart may be growing less and less each year in the United States, but they continue to grow at a very healthy rate internationally. Between 2007 and 2011, Wal-Mart’s international locations grew at an average rate of 13.65% per fiscal year (Walmart Corporate), a predictable trend since many of the world’s larger companies desire to gain footholds in emerging markets.

Wal-Mart’s international business contributes $109 billion in sales to the Wal-Mart brand (Walmart International), which represents an increase of 12.1% over the previous year. Wal-Mart has expanded their international portfolio in recent years, taking up positions in Chile, while opening four new stores in India last year via joint ventures.

In addition to their international subsidiaries, Wal-Mart also operates Sam’s Club, Inc. Sam’s Club is a significant part of Wal-Mart’s revenue, constituting $49.35 billion of their annual revenue (most recently filed 10-K report), a number that has grown 3.5% since the end of their last fiscal year. While the growth may not be there anymore for traditional stores, as is implied by their measly 0.1% revenue growth last year, maintaining their position in Sam’s Club should still provide bounties of cash for Wal-Mart to play with.

As with any company, maintaining an effective plan for the future is paramount when considering any type of financial maneuvering. Wal-Mart has taken-on $12.081 billion in new debt this past year (Yahoo! Finance). This increase is significantly higher than the $1.885 billion increase from the previous year. This increase in liability may be largely due to the company’s focus on growing internationally and converting many of their traditional retail stores into Wal-Mart Supercenters (which sell groceries in addition to Wal-Mart’s normal lineup of items). This holds significant weight since grocery items constitute 54% of Wal-Mart’s annual sales (10-K report).  Wal-Mart reported converting 102 of their traditional discount stores to Supercenter locations over the past year.

Despite losing ground in the American market, Wal-Mart was still able to report decent growth throughout revenue, net income, and operating income. Between 2008 and 2010, revenue, net income, and operating income grew 2.16%, 10.72%, and 5.92% respectively (10-K report filed March 30, 2011). These positive numbers backup Wal-Mart’s respectable 2.53% dividend yield (as of 12/14/11, Google Finance). Wal-Mart sports a low 0.36 beta (as of 12/14/11, Google Finance), which is essentially an overall measure of a stock’s risk and volatility.

Additionally, Wal-Mart is extremely maneuverable with their product offerings. What does this mean and why is this important? When you walk into a Wal-Mart and take a look around, what do you see? A giant wide-open warehouse with a vast array of aisles, shelving units, and racks all strategically placed to put the products you are most likely to buy right in front of you. They can change the setup very quickly if they need to adapt to new consumer spending habits or evolving economic conditions. For example, if the economy is slowing down and people stop buying televisions and other high-priced electronics, it doesn’t take much for Wal-Mart to scale back their electronics section and increase their grocery section.  Groceries are a consumer staple that will continue to be purchased regardless of economic conditions and are a much more efficient use of space then endless aisles of flat screen TVs.   By offering such a large array of not only discretionary but also consumer staple products, Wal-Mart is able to stay on top of economic  trends and adapt much faster than other retailers.

The world economy has been in a type of turmoil we haven’t seen in this generation, and consumers may be looking to save as much money as they possibly can in fear of another impending recession. When money gets tight, consumers typically flock to low-price retailers like Wal-Mart. With Christmas coming and Wal-Mart providing both gifts and groceries to consumers, there should be little fear of Wal-Mart losing business anytime soon.

The only fear is that the retail powerhouse may not have much more room to grow in the United States, a very real concern that may scare off some potential investors. However, bolstered by their significant international portfolio of subsidiaries and joint venture experiments, their revenue from Sam’s Club stores, and their other affiliates and subsidiaries like Vudu, I believe Wal-Mart should continue to keep investors happy through the near future.