As investors, at least, maybe we should stop worrying about the consequences of a Wal-Mart opening near us and start worrying about Wal-Mart itself. Never mind that Wal-Mart-haters think the company represents a vast global conspiracy of greedy capitalists run amok (and they may be right). Just as the demonizing of the world’s largest retailer hits its peak, Wal-Mart, as a company, may be falling apart.
As its tentacles reach every state and almost every municipality in the nation, Wal-Mart has become public enemy No. 1 for politicians, small-business champions, unionists, and journalists. You name it, Wal-Mart’s been beaten up for it: low wages, shoddy benefits, predatory pricing versus mom-and-pop outfits, and an anti-union stance that makes Henry Ford look like a shop steward for the United Auto Workers. How hated is this company? Here in New York, the company announced in December 2004 that it planned to open a store on Queens Boulevard in 2008, but the strategy quickly drew fire from residents, unions, small-business owners, and local politicians. By February 2005, Vornado Realty Trust told city officials that Wal-Mart would not be part of its plans to develop a retail center on the Rego Park site. Word that the retailer was also looking at sites in Staten Island drew similarly swift opposition. In California, meanwhile, there’s a bill making its way through the State Legislature that would force Wal-Mart and similar big-box retailers to pay the legal fees of any municipality that prevails in a lawsuit to block such companies from building a store. That’s class warfare of a kind that we haven’t seen in this country in 70 years. Can expropriation be that far behind?
To listen to the despondent Wal-Mart critics, you would have to wonder whether the Lilliputian consumers can ever defeat this retailing Gulliver. Don’t be fooled. Wal-Mart’s more of a Goliath than a Gulliver. And Davids are popping up everywhere. Wal-Mart, the once-venerated king of American retailing, has in the past year become Wal-Mart the pitiful helpless giant reduced by a collection of third-rate retail powers, if I may be so bold as to borrow language from our nuttiest president ever. For more than a year now, Wal-Mart’s been reporting horrible numbers, just awful, while the rest of retail is in ascendancy. One hundred million people may still shop there every week, but from the looks of the numbers, they aren’t buying much of what they see.
Despite the dismal financial performance, which has produced a horridly underperforming stock that has flatlined for seven years now, Wal-Mart’s management is in total denial. Almost every month, CEO Lee Scott starts afresh with an optimistic prediction of how the next five weeks will go. Then routinely, at the end of almost every month, the company misses its projections. The worst part is, no one seems the least embarrassed by this performance, least of all Scott himself. Going into October, Wal-Mart predicted 2 to 4 percent sales growth. Then, in early October, the company lowered its projection to 1.3 percent. When it finished the month, Wal-Mart turned out to have gained only half of one percent. This at a moment when almost every other major retailer was meeting or exceeding its higher targets. There was a time when such an overpromise-and-underdeliver phenomenon at this once-smartest of all retailers would have been unthinkable. Now it’s a given. That’s why, for the first time since Sam Walton could visit all of his stores in his beat-up old pickup, it’s worth asking if we are not seeing the twilight, not of the consumer—as so many media pundits speculate because of the incredibly low single-digit growth from Wal-Mart—but of the largest American retailer itself.
What’s ailing Wal-Mart? People don’t mind shopping at a down-market, politically incorrect store, if the prices are low enough. That was always Wal-Mart’s game. But now the other guys have figured it out. A number of Wal-Mart’s competitors now offer similarly low prices and a better shopping experience. Take Target. Wal-Mart’s sloppy aisles, dowdy clothing, and junky presentation have all the charm of GUM, the grim old monopolistic chain of the former Soviet Union. Target, meanwhile, is a joy. And its in-house merchandise, the key to its bountiful profit margins, rivals the stuff you can find in much more expensive stores—at price points that still make you feel like you’re getting the deal of the century. We live in an era when consumers, more than ever, want to feel rich. Wal-Mart may still be competitive on the price front, but it’s losing the quality game. In the most recent quarter, same-store sales for Target grew 4.6 percent, compared with 1.5 percent for Wal-Mart.
JCPenney’s got a different but equally killer strategy aimed at Wal-Mart. The store is divided into lower-, middle-, and upper-class price points (at the entry level, you’ll find private-label brands like Arizona jeans; at the mid-level, brands like Levi’s and Dockers; and on the high end, JCPenney recently signed a deal with Liz Claiborne). And the strategy’s working: JCPenney has been the most consistently profitable broad-line retailer in America for several years now, and the gains have largely come at Wal-Mart’s expense, as many lower- and middle-class shoppers have been gravitating toward the store’s higher levels (with their higher profit margins) over time.
It’s not just apparel and soft goods that Wal-Mart’s losing at. Best Buy, the giant electronic big-box retailer, has figured out a way to beat Wal-Mart, too: offer superior customer service on big-ticket items like TVs and computers. Best Buy has trained its salespeople to be genuinely knowledgeable about what they sell. I don’t know if I would trust a Wal-Mart clerk to know the differences between an LCD TV and its plasma competition. A Best Buy representative would know the differences in his sleep. Best Buy has its “Geek Squad” to fix computers, Wal-Mart just has geeks.
For the first time since Sam Walton could visit all his stores in his pickup, it’s worth asking if we’re not seeing the twilight of the largest American retailer.
You want sporting goods? If you’d like better selection at prices similar to Wal-Mart’s, go to Dick’s, which is opening supercenters to compete—and win—against Wal-Mart’s sports repertoire. Costco’s winning the bulk-purchase war against Wal-Mart’s warehouse stores. Costco’s another fun place to shop: I am a proud Gold Star member—love the birthday cakes and king-crab legs, and the barbecue’s not bad either! There’s no pride in belonging to Sam’s Club, the Wal-Mart counterpart, and since the stores’ prices are comparable, there’s no real reason to shop there.
Wal-Mart’s attempts to fight back have been pathetic, to say the least. It initially tried to go “hip,” of all things, by offering more-fashionable clothes, but that effort fell flat on its face rather quickly, and the store’s apparel sales, meager as they were, nose-dived.
Now Wal-Mart seems to have settled on a new strategy—issuing press releases about how it’s going to refocus on discounting merchandise. First it issued releases saying it’s offering pharmaceuticals below the prices of the big drugstores, places like Walgreens and CVS, that have been eating its lunch for years. It’s phony altruism, if you ask me, done mainly to buff the store’s image. The discounted pharmaceutical offerings aren’t that competitive and cover only a small percentage of the vast array of prescriptions purchased at drugstores. Next, the company told the press—clearly because its sales have been weak going into Christmas—that it will discount all of its electronics, including big-screen TVs, underneath its competitors. That’s another canard: The research department at Prudential has surveyed the Wal-Mart TV line and found no serious price cuts versus Best Buy’s. In other words, Wal-Mart’s new discounting push is really just another bogus series of moves by the store to attempt to stem its customer defections.
How can Wal-Mart turn things around? First, it has to acknowledge that the wheels have fallen off the Bentonville Bus. Then it has to bring in some savvy merchants from the outside and give them a real chance to improve the quality of the stores—the atmosphere, the merchandise, the service, everything—without raising prices. (And it wouldn’t hurt if Wal-Mart would create, if not a Starbucks pro-labor feel, at least something that makes shoppers feel that it’s not a global retailing bully and its workers aren’t all desperate retired folks.)
We are nowhere near that now. Wal-Mart’s still thinking that all is well, and that only Wall Street doesn’t understand the greatness of the chain. Funny, Wall Street actually respects Wal-Mart more than it should—it’s Main Street that’s deserting the place in droves. And while Wal-Mart might have just given us a “good” earnings report, the reality is that the numbers only looked good given how low Wal-Mart had set the bar. Until Wal-Mart gets new management, I don’t see its fortunes improving. To me, the company’s stock is a sell, at least until it gets down to the sort of rock-bottom price that Wal-Mart prides itself on offering.
James J. Cramer is co-founder of TheStreet.com. He often buys and sells securities that are the subject of his columns and articles, both before and after they are published, and the positions he takes may change at any time. E-mail: jjcletters@thestreet.com.