How have WMT common shares performed in the last four years?

This is pretty easy question to answer by looking at the chart below. Wal-Mart Stores, Inc. (NYSE:WMT) was sitting at almost the exact same price at the start of calendar year 2003 as it is today (perhaps a tad higher). WMT shares were in the mid-$40s back four years ago before Wal-Mart's share price started seeing the likes of $61 per share in 2003 and into 2004. At the same time, Wal-Mart was pumping up its revenue from $258 billion to $287 billion -- a jump of roughly $29 billion.

That's quite a bit of revenue increase, but at the same time net income rose just $1.2 billion. So, sales increase at the rate of $29 billion and net income rises $1.2 billion for the same time period. This can be seen as decent for discount retail really, but is Wal-Mart sacrificing lower margins for more revenue? It would not be the first time that overall sales seem more important a focus than actually making money. Ask the dot-com dustbin of miserably failed companies about this. But, we're sticking to retail here of course.


So, after glancing at the above chart, let's look at Wal-Mart's sales review figures for the same period (excluding 2002):

2003: $258.6 billion ($9.0 billion net income)
2004: $287.9 billion ($10.2 billion net income)
2005: $315.6 billion ($11.2 billion net income)
2006: $344.9 billion ($12.1 billion net income)

Let's discuss, shall we?

The moving target goal of upping income proportionate to revenue

One could say that Wal-Mart has done incredibly well -- growing sales from $258 billion to almost $345 billion -- that's an $86.4 billion increase in sales in the last four years. Either Wal-Mart has been expanding like crazy domestically and overseas or it is getting more customer sales and more foot traffic -- known as "ticket and traffic" in the retail arena. But, at that same time, the world's largest retailer has grown net income to the tune of $3.1 billion. Hmm -- sales growth of over $86 billion and net income growth of only $3.1 billion. Does this strike anyone as rather low?

Wal-Mart spent the good part of 2006 telling the investing community and the financial pres that it wanted to grow margins better -- for several reasons. First off, it can't keep up this torrid growth rate (in terms of revenue) forever, and it knows this. Wal-Mart will always appeal to its custom-picked target demographic: The lower-income public who wants the absolute lowest price on everything while being able to buy everything they need at one place. Okay, fine -- no issue with that. But, to keep revenue growth coming and to start actually making a healthier profit (which investors should demand I think), the company has to start branching out into more customer demographics (i.e., stealing customers back from Target and specialty stores) while making the shopping experience personalized in a way that modern consumers expect.

In addition, the retailer, has been mixing the product mix up more and more with higher-margin goods in some areas, like consumer electronics (except for the price-plummeting flat-panel TV) and organic foods and produce. has this pumped margins up yet? Nope -- and it will take time before the "fruits" of that labor pay off or fail for Wal-Mart. My question is -- is it too late for the retailer, or have the coveted customers is desires moved on to other retailers with new loyalties, leaving Wal-Mart with the same old bag of tricks it has mastered well -- the customer who shops with only price in mind?

Wal-Mart's changing strategy needs to succeed

So, here we are in 2007 and WMT shares are performing at their lowest year-over-year level since 2002, while sales have increased dramatically and net income has increased at not-so-dramatic levels. Is the financial community fed up with Wal-Mart's chasing of the revenue dollar and several failed strategies in domestic marketing (can you identify with Wal-Mart's marketing?) and overseas markets (pulling completely out of south Korea and Germany) combined with a paltry amount of growth in actual income over the last four years?

Wal-Mart shares are today sitting at $45.65 as I write this, and they were above $50 not too long ago for a very brief period. While monthly same-store sales figures for competitor Target continue to shine every single month (beating estimates a majority of the time), Wal-Mart figures seem to always fail to impress. Yet, every time I visit a local Wal-Mart for research purposes the store is packed with shoppers, and especially in the grocery areas. Form this highly subjective viewpoint, Wal-Mart sales should be steadily climbing -- and they have been in recent years obviously. Where is all that profit evaporating to, though?

Wal-Mart's strategy to continue goosing sales with higher-ticket items and luring in new regular shoppers to buy new higher-margin food items may yet work well, although I can't see how Wal-Mart is going to explode its grocery margin business when the organic food companies could barely keep up if Wal-Mart started ordering large quantities of those products quickly.

Maybe that is already happening, but so far I don't see it in a large way (just a very small way). If Wal-Mart's strategy to get more profit from many items only gets on the radar of its core customer right now (who probably could care less), nothing will materialize with these efforts. But, if Wal-Mart can get new customers and prior customers back into stores with some kind of renewed focus and move those higher-margin products out the door consistently, maybe the investing community will reward it with a share price indicative of those efforts. If this is the case now, that effort -- so far -- has failed.

Next week I'll be taking another field trip into my local Wal-Mart stores to talk to associates and get a general feel for the working conditions at these stores. Are they as bad as the media reports them to be? Are Wal-Mart associates unhappy, bitter people or glad to have their jobs and benefits. Stay tuned next Thursday and you will find out. Until then, have a great weekend!