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February 11, 2010

In the near-term there is little to suggest that Wal-Mart shares are anything more than still stuck in a narrow range.  Even with what appears to be a flurry of recent organizational and strategic changes, the company’s performance remains relegated to a simple two factor equation- traffic and pricing.


After another year of lackluster share price performance, it seems that the Street is looking for reasons to own Wal-Mart in 2010.  The shares have been subject to two upgrades in the past two weeks, so there is sure to be something going on here, right?  Well, on the surface it looks like there’s been more activity at the largest company on earth in the new year than we’ve seen in a while.  Let’s take a look at some of the company’s recent announcements:

  • Formation of a global sourcing initiative with Li & Fung. The arrangement begins with $2 billion worth of goods, which is not much at all considering WMT is on pace to deliver north of $405 billion in revenues this past year.  The larger initiative also calls for an increase in focus on direct imports and global sourcing.  Haven’t we heard about this at almost every analyst day over the  past five years?
  • Sam’s Club store closings (10 stores, 1,500 employees), outsourcing of demonstration employees (10,000), and the elimination of new business representatives at the clubs.  Hmm, another pseudo-restructuring at Sam’s Club.  But will this finally be the move that closes the productivity gap with Costco? Not a chance.
  • New operations structure for Wal-Mart U.S which consolidates Real Estate, Operations, and Logistics under one leadership team to foster more value for customers, growth for associates, and returns for shareholders.  We’re missing how this one will actually work.  The memo on this topic was the longest, but also the lightest on real details.
  • Realignment of merchandising categories. Alignment of Store Planning with Customer Experience Teams.  This makes the most sense, but after the Store of the Community was unveiled we thought the marriage of what the customers want and what Wal-Mart sells were already one in the same.  Looks like there will always be work to be done here.
  • Integration of Puerto Rican operations into Wal-Mart and Sam’s Club U.S.  Definitely a cost savings measure but it probably is a rounding error given the law of large numbers here.

So what do all these moves, changes, and dense employee memos really mean?  They need to do something (anything?) given that U.S same-store sales have been negative for what is likely to be 3 quarters in a row and EBIT margins have been in an extremely narrow range of 40 bps over the past 6 years.  Stability is what makes this a staple in the truest sense, but it certainly doesn’t make for an exciting investment opportunity, LONG or SHORT.  Yes, earnings have been growing over the same time frame, but at a decreasing rate for each subsequent year.  Wal-Mart’s historical stock performance coincides with its financial results.  The share price performance over following durations is: YTD -0.22%  , 1YR +11.76% , 5YR -0.24%, and 10YR -5.29%.  So in other words, an investment in Wal-Mart has basically been like holding cash.  

After some digging into the model, it’s seems clear that even with all these organizational and strategic maneuvers, Wal-Mart is still relegated to a simple two-factor equation.  Traffic and pricing.  Both are fairly easy to decipher in the near term.  With the economy in its current state, there is no question that Wal-Mart has benefitted from a traffic boost.  But in the absence of a measurable change in the economic backdrop to the downside, the traffic outlook looks status quo at best.  We have simply passed the peak, based on what we know today, in the year over year growth in consumers trading down to deeper discount retailing.  There is no question that the payroll cycle is still as pronounced as ever, but with unemployment no longer getting worse and even food stamp usage growing at a lesser rate (see yesterday’s post “SNAP Participation Growth Slowing” for more detail), Wal-Mart’s incremental traffic opportunities appear harder to come by. 

That brings us to pricing.  The Holy Grail that investors keep pointing to is inflation.  Yes, we are seeing signs of inflation in food and consumables.  Costco confirmed this on their recent sales call, but simple math also suggests that 2010 will be inflationary for consumables.  After all, we are coming off of the most deflationary period in food and consumables in modern history.  With that said, what is Wal-Mart going to do with an inflationary trend?  If we read the tea leaves and look at the subtleties of the company’s recent memos, “lower prices” remain the cornerstone of Wal-Mart’s efforts. 

While bullish investors may be putting on long trades in Safeway and Kroger because of the mighty inflation, Wal-Mart is probably going to spoil the party.  Roll-backs will continue, forever.  All of the efforts to lower cost of goods are not solely aimed at boosting the gross margin line.  Yes, there may eventually be some benefits to consolidating SKU’s and finally building a global sourcing organization, but reinvestment in price to drive market share still appears to be a top priority.  It’s embedded in the culture and this is one thing that is highly, highly unlikely to change.

As a result, in the near-term there is little to suggest that the company’s fundamentals and share price are anything more than still stuck in a narrow range.  To meaningfully break this cycle of monotony, we would have to see a few key things: 1) merchandising efforts actually work and drive a mix shift back towards discretionary goods, which in turn drives average ticket and margins higher, 2) a meaningful pick up in contribution from international at higher EBIT margins (unlikely as the non-U.S units collectively remain in growth mode) and 3) an acceleration in traffic (share) growth as a result of all of the above-mentioned efforts combined.  In theory, achieving this short list is what management needs to do to get out of the rut of consistency.  In reality, the hope of inflation as a savior and reliance on merchandising changes to drive margins higher are likely to be disappointing to those looking at 2010 as a breakout year for the largest company on the planet.

R3: WMT: The Rut of Consistency - 1


  • After a very strong boot season, JNY management indicated that they expect the category to remain strong throughout the Spring/Summer and into Fall 2010. As a reminder, history suggests that it’s very unlikely to see two “very strong” boot seasons in a row, especially since cold weather typically acts as a boost to the upside for boots. However, it is notable that Nine West has returned to Nordstrom in all doors- clearly a vote of confidence from the most important footwear retailer in the U.S.
  • What do you get when you cross Crocs with Converse Chuck Taylor All-Stars or Clark’s Wallabees? Native Shoes. Check them out here: http://nativeshoes.com/. Clearly there is still a chance to actually make injected-molded footwear look cool…
  • Despite the growth in the use of email as a marketing tool, especially by retailers, a new study by Return Path suggests not all emails are reaching recipients. The new study shows that 20% of email in the U.S and Canada is not making it into the inbox. Approximately 3% is going to straight into a “junk” folder, while the remainder is “going missing”.


Gap Inc. Shuffles Leadership - Gap Inc. is resetting its top ranks in an effort to correct prolonged product issues at the Gap division, sustain momentum at Old Navy and possibly bring the chain overseas, WWD has learned. The moves also identify Gap’s future leaders. In the biggest change, Pam Wallack will become president of Gap adult and body, filling a slot vacant for 18 months since the departure of Gary Muto, who is president of Loft. Those duties were being handled by Marka Hansen, president of Gap North America, and other executives. Wallack, who was running Gap kids and baby businesses for the past five years, will report to Hansen.  Succeeding Wallack as head of Gap kids and baby businesses is Mark Breitbard, who since last year has been Old Navy’s chief merchandising and creative officer. Previously, he was president of Levi Strauss & Co.’s retail division and senior vice president and general manager at Abercrombie & Fitch Co., but he held merchandising jobs at Gap, Old Navy and Banana Republic from 1997 to 2005. <wwd.com>

Steven Madden Buys Big Buddha Handbags - Steven Madden Inc. has acquired Big Buddha Inc., the better-priced accessories line founded by Jeremy Bassan. Madden purchased the firm for $11 million in cash plus certain earn-out provisions that are based on financial performance through 2013. Bassan said he will stay on to oversee the line, which will move from its Santa Cruz, Calif., headquarters to Madden’s facility in Long Island City, N.Y. “We’ve bought the bags for our stores in the past and they’ve been fantastic, and we love that it’s a young company with tremendous value,” founder Steve Madden said. “We want to help with their distribution both domestically and internationally, and the bags really fit in with what we’re doing.” Since its 2003 inception, Big Buddha has produced better-priced accessories for department stores and online retailers, such as Dillard’s and Piperlime.com. In 2009, Big Buddha had net sales of $13 million.  <wwd.com>

Gildan Activewear to Open Distribution Center in South Carolina - Gildan Activewear will locate a new distribution center on Clements Ferry Road in Charlston, SC, with operations expected to begin in the next few weeks. Gildan expects to hire about 250 people this year for the new facility. Gildan has purchased the former Mikasa building, which is located in the city of Charleston and in Berkeley County. "This state-of-the-art facility will be utilized to support the company's strategic initiative to become a major full-line supplier of basic family apparel for national mass-market retailers," Glenn Chamandy, Gildan president and CEO, said in a statement that the S.C. Department of Commerce released today. <sportsonesource.com>

LaCrosse Footwear Plans New Danner Factory - LaCrosse Footwear, Inc.  plans to move into a new Danner factory in Portland, Oregon. The new Danner facility will be located in an industrial building approximately one mile from the company's corporate headquarters. The new factory will be approximately 59,000 square feet, representing twice the square footage of the company's existing Portland-based factory which is being replaced. The new facility's lease is scheduled to begin during the second quarter of 2010 for a term of approximately five years, with options to extend the lease for up to 15 more years. DP Partners is serving as the developer for the project. LaCrosse expects to begin production in the new facility in the third quarter of 2010. During 2010, the company expects total capital expenditures to be approximately $8 to $9 million, which includes leasehold improvements and machinery for the new factory facility. During the transition period from the current factory to the new facility, the company plans for certain one-time costs of approximately $0.5 million, which are expected to be included in its operating expenses in the second and third quarters of 2010.  <sportsonesource.com>

Harry and David shakes up the CEO suite and brings in an outsider - Harry and David has named Steven J. Heyer as its next chairman and CEO to replace president and CEO Bill Williams who has left the company. Heyer joins Harry and David, which owns and operates HarryandDavid.com, Wolfermans.com and HoneyBell.com, from Avra Kehdabra Animation LLC, a computer animation studio. Prior to co-founding Avra Kehdabra, Heyer also served as chief executive officer of Starwood Hotels & Resorts Worldwide Inc. and as president and chief operating officer of Turner Broadcasting System Inc.  <internetretailer.com>

C.P. Company Sold To FGF Industry SpA - The owners of Sportswear Company SpA have sold their C.P. Company division to FGF Industry SpA, the company owned by designer-entrepreneur Enzo Fusco, who produces and distributes Blauer USA, BPD, Design by Enzo Fusco and Sweet Years. Sportswear Company, owned by siblings Carlo and Cristina Rivetti, retains ownership of its Stone Island brand. The operational handover will take effect with the spring 2011 collection. WWD first reported that C.P. Company was on the block last month. Founded in 1975 by Italian designer Massimo Osti, C.P. Company built a cult following with its military-inspired silhouettes and customized textile treatments. Last spring, Rivetti appointed Wallace Faulds, a deputy of John Galliano, as its designer. The brand shows in Milan. <wwd.com>

Sports apparel and home improvement brands climb the buzz charts - Amazon.com Inc. continues its run as the most talked-about retailer on the social web for the fifth consecutive month, according to the monthly Zeta Buzz Top 25 Retail Standings Index, a measurement of online retail chatter conducted by digital marketing firm and social media monitoring service provider Zeta Interactive exclusively for Internet Retailer. The brands showing the most positive movement in the rankings since last month were the Home Depot (+9), Lowe’s (+7) and Nike (+6). The brands with the most negative movement were Barnes & Noble (-11), GameStop (-7) and Old Navy (-6). There were five retail brands new to the Top 25 list this month: Costco, Walgreens, Staples, Dick’s Sporting Goods and Adidas. Five retailers dropped out of the Top 25 rankings this month: H&M, Aeropostale, J.C. Penney, Radio Shack and Toys ‘R’ Us. “Retailers in the sports apparel and home improvement industries experienced the biggest buzz increases—a sign that post-holiday fitness resolutions and improvements around the house are top of mind for consumers,” says Zeta Interactive CEO Al DiGuido. <internetretailer.com>