Pennsylvania Investment Observer

Wal-mart: Friend or Foe

by Judy Loy

Wal-Mart is many things and attracts or repels people in equal measure. For instance, I have clients that specifically request that I never put Wal-Mart stock in their accounts, and my husband claims he gets the shakes and hives anytime he even gets near a Wal-Mart. However, my mother wouldn't shop anywhere else for her groceries and other necessities and she goes for her regular trip every weekend. Anything as large and dominating as Wal-Mart is bound to bring controversy and opposition. It's human nature. Wal-Mart was featured in two articles as of late. The Saturday Wall Street Journal on December 3rd featured an article entitled, "Gauging the Wal-Mart Effect," and the Monday, December 5th USA Today Money Section had the Wal-Mart smiley face (the one that drops prices all over the stores in commercials) on the front cover with arrows through its forehead over an article entitled, "Growing Opposition Frowns on Wal-Mart." There is much emotion and debate over the effects of the behemoth that is Wal-Mart.

For now, let's look at the facts. Wal-Mart is the world's largest retailer and it trades on the New York Stock Exchange under the symbol WMT. It pays out a quarterly dividend to its common stockholders and has stores in the U.K., Mexico, Canada, Argentina, Brazil, China, Germany and South Korea. Wal-Mart Stores include the discount stores, the super-centers, two of which are in State College, and Sam's Club. The company also sells merchandise under the brands, Sam's American Choice, Popular Mechanics and Better Homes & Gardens. Of its 5,482 stores, 70% are in the United States. While State College has two Wal-Mart stores, the least amount in a U.S. state is a mere four in Vermont. Who has bragging rights to the most stores, Texas with 401. The USA Today put it in perspective, "If Wal-Mart was a country, its' economic output would be the 20th largest in the world." While its sales per share have been increasing in the past five years, the stock's price is stuck in a trading pattern, running from around $41 to as high as around $68 since the year 2000. We are in the bottom part of that trading range right now, with Wal-Mart closing at $47.97 on Friday, December 2nd. Does this mean Wal-Mart stock is an opportunity at this price? If it is making its upturn in the range, the answer could be yes with a possible $20 opportunity to the upside.

The main beef with Wal-Mart has been its effect on the local economies upon its arrival in a community. Small retail shops can't compete and retail workers in a community with Wal-Mart earn 3.5% less. However, the company says it pays its employees an average wage of $9.68 an hour and minimum wage is only $5.15 an hour. The National Bureau of Economic Research did an independent study last month which concluded that Wal-Mart does adversely affect employment and wages when moving into a community. The company countered that study by funding their own through Global Insight. Their study found that Wal-Mart openings led to cuts in consumer prices of about 3%. Their point was that prices go down because of Wal-Mart and sufficiently offset the lower wages caused by Wal-Mart. Therefore, real disposable income actually increased due to the company. While Wal-Mart may not be making its average employee rich, it did make Sam Walton's (the founder of Wal-Mart) family incredibly wealthy with an approximate combined fortune of 90 billion dollars!

Another recent war was waged on Wal-Mart due to its employees' health coverage. The national average for employees enrolled in company health plans is 67%. Wal-Mart covers just under half of its employees. However, stacked against retail stores, who only cover about 46% of their employees, Wal-Mart comes out ahead. There is much talk of Wal-Mart employees becoming unionized, which could drive up labor costs. This could cripple the stores' ability to have bargain basement prices.

No doubt Wal-Mart is feeling the back lash from its unheralded success in the retail arena. Can it maintain its dominance in the face of rising labor costs, environmental issues and the current storm of negativity? Time will only tell if Wal-Mart is a store for the ages or just the next stepping stone.

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