Is Wal-Mart Past Its Prime?

Wal-Mart (NYSE: WMT) is America’s, and the world’s, largest retailer. With more than 3,000 superstores and nearly 4,000 stores in the United States, the company earns one out of every 10 U.S. retail dollars.

And last year, revenue topped $420 billion.

The company’s success over the past few decades came largely through its superstore strategy. Walmart planted megastores in nearly every suburban location across the country. But in the age of high fuel prices, that strategy shows much vulnerability.

Retail in Decline

Walmart store performance has been lousy. If you total up all the sales from its U.S. stores open for at least a year, revenue for Walmart fell eight straight quarters.

Little wonder that today, more and more investors are raising questions about company’s strategy and whether Walmart is past its prime.

So where did Walmart go wrong?

Some of its struggles are through no fault of its own… As James Carville once wrote, “it’s the economy, stupid.”

Some 35 to 45 percent of its U.S. business comes from households that earn less than $50,000 a year, according to brokerage firm International Strategy & Investment Group. But the recession hit the poorest segment of the U.S. population the hardest, with more unemployment and falling home prices.

And then Walmart management made a key mistake. Beginning in 2008, the company abandoned the “everyday low prices” strategy made famous by its founder, Sam Walton. Instead, Walmart started raising prices on many items while offering special deals on others.

The company also decided to narrow its item selection in an effort to compete with rival Target (NYSE: TGT) for more affluent customers. But in the process, Walmart abandoned its core customers and alienated many low-income shoppers.

Many of these shoppers went elsewhere, to competitors like Dollar Tree (Nasdaq: DLTR). That’s why last year, for the first time in a decade, Walmart’s share of merchandise markets fell from 13.9 percent to 13.4 percent, according to retail analysts from Credit Suisse.

Assurances from the Duke

The CEO of Walmart, Mike Duke, says the trend is temporary and not to worry. But two years is a rather long time for a “temporary” trend.

Mr. Duke also added that his company will soon reverse the trend. But can it?

Walmart did it before. In the 1980s, for example, it transformed itself when the company introduced sales of groceries to its supercenters.

But the retail landscape looks vastly different this time.

For one, cash-strapped consumers can’t afford to buy in bulk anymore. They’re purchasing goods in smaller quantities. Walmart isn’t catching on to that trend yet.

Then there’s the internet. Whereas Walmart has struggled in the past eight quarters, sales at online retailer Amazon.com (Nasdaq: AMZN) have doubled in the same period.

Bargain hunters abound on the internet. They use sites like Groupon and Living Social, which offer discount coupons for goods. It’s another major trend that Walmart isn’t aware of yet.

A former executive at Walmart, Jimmy Wright, assessed the current situation correctly. He said, “In the 1970s, 1980s and 1990s, Walmart drove change [in the retail sector]. Now I think change is going to be driving Walmart. Walmart will be playing catch-up to the lifestyle dynamics of today and tomorrow, versus creating them.”

Mr. Wright is correct. Until a new management team comes in and awakens the sleeping giant, investors should bear in mind one idea.

Walmart may still be the biggest retailer, but it’s no longer the best. Its stock will continue to lag the sector.

Good investing,

– Tony D’AltorioSource: Investment U

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