- CEO Doug McMillon's moves are already seeing some results.
- WalMart is not going anywhere, having a virtual retail monopoly in many places.
- Managers are not yet responsive to communities, but that will change.
Walmart (NYSE:WMT) shares were fighting to hold $60 on Tuesday, having fallen there in October after CEO Doug McMillon told shareholders the company was going to forego profit for a few years in order to fix its e-commerce problems and absorb employee pay increases.
A surprisingly strong earnings release on November 17, with operating income up 9.3% even though sales declined 2.2% from a year ago, helped get the stock off its lows of $56/share to a November 19 high of $61.46. But it has fallen back since.
Analysts have a mixed view of McMillon, a WalMart lifer in his mid-40s who took over in early 2014. But he has spent his entire working life with the company, he knows it thoroughly, and the moves he has made since taking the reins have made sense.
The problem is that WalMart is a very, very large ship that will take time to turn around, especially since McMillon’s plan reaches so deep into his specialty of operations.
Every change McMillon makes has a profound impact. The small wage increase given to experienced associates this year, for instance, has had a big economic impact in the small towns across America where WalMart is often the only store in town of any size, and by far the largest employer. It’s probably responsible for some of the economy’s surprising strength in the third quarter, as those raises were immediately spent.
The importance of WalMart in small towns and cities is often ignored by analysts, who generally live in New York, but WalMart is the whole economy in many places. When Walmart fires a man for re-selling cans it’s news, when WalMart becomes a locus of street crime it’s news, and when a customer falls in love with its sweet potato pies that is often news.
The problem for McMillon is his managers often react to events in a very impersonal manner, more focused on their personal careers than the lives around them. This has to change. McMillon has promised it will.
There is an assumption among some bears that WalMart’s problems are impossible to solve. But WalMart is not going anywhere. It has a virtual retail monopoly in many American cities, and it has sales of $500 billion per year while U.S. retail sales are running at $446 billion each month. But there is room to grow. WalMart draws nearly one-third of its sales now from outside the US -- $30 billion of the third quarter’s almost $117 billion in revenue was international.
McMillon has put in plans that should work (I haven’t even mentioned the Neighborhood Market concept that competes with in-town grocers like Kroger (NYSE:KR) and Whole Foods Market (NASDAQ:WFM), and some progress has already been made. This ship will just take a few years to turn around. You don’t need to buy Walmart stock today, but it should be a piece of your portfolio, and that $60/share price won’t last long.