Wal-Mart Weekly: Wal-Mart wary of economy, but should it be?

Bucking the trend for a reason

Just last week, Wal-Mart reported a 10% increase in third-quarter profit to $3.14 billion, or $0.80 per share. That's not a loss, but a profit. Fellow retailer Best Buy, Inc. (NYSE: BBY) has seen rapid, seismic changes in consumer behavior and sees a very rocky road ahead. Wal-Mart has also warned that it sees problems ahead, but has not used language or stern warnings like other retailer. It knows that it was the first-mover in retail to nail (and nail and nail) to the consumer forehead that it was the go-to location for discounts on everything.

Consumers have responded: they continue to take financial shelter at Wal-Mart for everything they can while other retailers see incredible dollar pullbacks from all consumer segments. Just ask a real estate agent or car salesman about this, let along Joe's gourmet coffee shack or Sally's high-end beauty parlor. In fact, Wal-Mart's recent Q3 results were up from the year-ago period of $2.96 billion in revenue and $0.70 per share. It increased revenue and profit at the start of one of the most severe economic pullbacks we've seen in decades. It's Q4 numbers will tell more of the tale, of course. Still, Wal-Mart will gain -- it's just a question of how much.

Why its history is paying off, big-time

How can Wal-Mart do this? Wal-Mart founder Sam Walton championed the absolute lowest prices for the consumer, and if that meant lower profits for suppliers or business re-engineering, so be it. Although Wal-Mart has outsourced just about everything in its retail chain but labor, the company has continued to push for the lowest price ("highest value" as it is often said) for every consumer. It wasn't always this way: back in 2006, sales were slowing as consumers flocked to higher-margin goods and wanted more than "cheap Wal-Mart stuff" as a friend of mine puts it.

Wal-Mart went in search of updated store designs, more customized product offerings for its locations and more high-margin product selections to recruit more affluent customers. It really didn't pay off. Consumers buy on emotion and reputation in many cases instead of fact and logic, so Wal-Mart saw limited success in its efforts. Then comes the start of 2008 and the world changes: consumers have no choice but to abandon gas guzzlers (although fuel has dropped to levels not seen since 2005 in my area) and drop back to buying discount wares.

Wal-Mart, of course, falls back on what it does best and serves the customer with the lowest prices on the best brands, day after day. As a result, the retailer is better equipped than any other company to weather a year or more of spending slowdowns as layoffs mount and the financial and auto industries float at the top of the fishbowl. That is, until they get their checks from Uncle Sam. For the auto companies, the check hasn't even been written yet.

Would you buy WMT shares now?

It's a rhetorical question: although many of us are stuffing what we can under the mattress and saving ever penny we can to insulate any part of out life from the economic turmoil underway, are you still investing? Wal-Mart shares did rise above the $50 mark for the first time in more than three years just this year (almost reaching above $60 back in September), but have since fallen to the above-$51 mark as of today.

WMT shares have not tanked like other blue chip companies (or any public company) and the retailer is taking spending dollars away from other retailers as well as being the shopping refuge for just about anyone buying anything at retail to a certain degree. Add both of those up and it's easy to see why Wal-Mart has been doing just fine in this economy (all things considered) and will continue to do so for the foreseeable future.

So, the question remains: would buying WMT shares make any sense? This isn't a stock going anywhere fast. It is old, large and isn't a bubble stock in a hot industry. It is, though, stable and as this year has shown, becomes somewhat a "savior" to those at the U.S. median household income level (right at $50,000 per year) who shop there when times are good, times are mediocre and times are bad. That segment of the U.S. -- Wal-Mart's largest market by far -- will always be here and will always have the largest buying population. Wal-Mart's entry into other foreign markets is just icing on the cake in the future. If you're investing, where are your dollars going?

Join me right here this Friday for an early-bird edition of The Wal-Mart Weekly. Until then, have a great week!