Wal-Mart Stores, Inc. (NYSE: WMT) is beginning to look like a bad episode of the TV version of Batman. Last week, I posted on Wal-Mart's paranoid spying unit -- nicknamed the Bat Cave. Today, The Wall Street Journal reported on yet another once secret project -- dubbed Project Red -- to spin off Wal-Mart's Sam's Club [subscription required] operation. Unfortunately, Wal-Mart shareholders would not be likely to benefit from such a spin off.
Wal-Mart's recent woes are considerable. Its stock price is down 20% over the last five years while rival Target Corp.'s (NYSE: TGT) -- whose TV advertisements are fantastic -- is up 75%. Meanwhile at Wal-Mart, a former vice chairman pleaded guilty last year to fraud and tax evasion related to using Wal-Mart funds for custom-made alligator boots and a dog kennel. He had said he was reimbursing himself for payments he made to help keep unions out of Wal-Mart. In December, Wal-Mart fired a senior marketing executive, saying she had had a personal relationship with a subordinate and accepted gifts such as pricey vodka from a vendor. When she sued, Wal-Mart filed in court what it said were suggestive emails.
Now, after firing Bat Cave member, Bruce Gabbard, for spying on a New York Times reporter, it emerges that he was part of the security team for Project Red. Wal-Mart hired two teams of McKinsey & Co. consultants, so neither could fully grasp the project. Cameras inside a room recorded their activities. The security team encrypted data and reports and created passwords to secure their work.
Setting aside the weirdness of Wal-Mart's spying, would spinning off Sam's Club boost Wal-Mart's sagging stock price? Probably not.
Sam's Club drags down Wal-Mart's overall profitability and spinning it off could generate a company with a $16.2 billion market value. How so? According to Wal-Mart's latest annual report, Sam's Club generated $41.5 billion in sales and $1.5 billion in operating income, a 3.6% margin which is substantially less than Wal-Mart Stores' 7.5% operating margin. Moreover, Sam's Club represents only 12.1% of Wal-Mart sales compared to 65.6% for Wal-Mart Stores.
Nonetheless, it's not too hard to estimate how much a Sam's Club spin off would be worth. Applying Costco Wholesale Corp.'s (NASDAQ: COST) price/sales ratio of 0.39, Sam's Club could be worth $16.2 billion as an independent company.
Unfortunately for Wal-Mart shareholders, Sam's Club's value may already be reflected in Wal-Mart's $199 billion market capitalization. It's not clear whether Sam's Club could be easily separated operationally from Wal-Mart Stores, and if so, how much such a separation would cost. Furthermore, I doubt that freeing Wal-Mart of this relatively minor operation would boost its margins enough to raise Wal-Mart's sagging stock price.
Maybe the two McKinsey teams on which Gabbard was spying can answer these questions. To the Bat Cave, Robin!
Peter Cohan is President of Peter S. Cohan & Associates, a management consulting and venture capital firm. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in Costco, Target, or Wal-Mart.
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Reader Comments (Page 1 of 1)
4-09-2007 @ 12:38PM
William Martin said...
For your information+++++
When Warren Buffett sells WMT then I might consider selling. He has his money where his mouth is. Thank you. Billy
4-13-2007 @ 7:35PM
madmilker said...
well, when it comes to "red"....they love the word ....ever chance they get they use. Once years ago...the name was Wal-Mart with a hyphen and after Sam's passing it became Wal*Mart with a BIG STAR in the name. Than if you look through there Departments....you see the Department of People! dang! don't know bout you but this would go better with the People's Republic of China...not the United States of America......but who am i to say!
Than there be this Global Warming thing and if you take the time and look who is in the game ..well, Walton's...by far! First Solar has taken off like a rocket and the push on fluorescent lighting is on everyones list but not a person talks about the "mercury" content.
Jobs are what America is losing...and Wal-Mart is the number 1 cause and by this time next year there will be 200,000 to 500,000 more lost cause Wal-Mart,China and Mexico struck a deal to bring all the containers into Mexico than have Mexican workers and drivers deliver to the USA.....and that sucks!
.........and that is why...........i don't glorify the "star" above their door!