Wednesday, November 23, 2005

Wal-Mart Gets Serious

Look, if you had one shot, one opportunity to seize everything you’ve ever wanted… “Lose Yourself”—Eminem

Like the Eminem alter-ego in “Lose Yourself,” Wal-Mart—one of the world’s truly great companies—has, thanks to union protests, California Luddites and a consumer base dealing with hurricanes and gasoline prices, been “chewed up and spit out and booed off stage” for the better part of the last two years.

There is an irony, I know, in using Eminem lyrics to describe the world’s biggest retailer, given that Wal-Mart stores do not themselves carry Eminem’s cds—what with the f-words and all.

But that song sprang to mind reading this morning’s articles about Wal-Mart’s plans to, as the song says, “seize everything” this coming Friday on the busiest shopping day of the year.

Despite all the recent bad press, including that very lame CNBC probing of Wal-Mart’s so-called dark side—the low point of which had to be a David Faber interview with the bitter ex-manager of Pillowtex, the former high-flying textile consolidator that crashed and burned, who predictably blamed most of his terrible operating record on his largest customer—Wal-Mart more or less has kept rhyming, adding $20 billion in sales the first nine months of 2005 alone. That amount is, annualized, the equivalent of half the entire Target chain’s full year sales.

And today we see that Wal-Mart is set to tear the roof off.

“According to early copies of Black Friday circulars,” the New York Times reports, Wal-Mart will offer “doorbuster” deals to get customers in the stores—it will match competitors’ circular prices while offering some whopping discounts of its own, such as a 42-inch plasma TV for $997, compared to $1,499 at Best Buy.

Toys “R” Us, which I’ve long thought of as Toys “Aren’t” Selling, dismisses the Wal-Mart onslaught by saying “You can’t match what you don’t have,” claiming that 80% of the discounts Toys “Aren’t” Selling will offer on Black Friday can’t be found at Wal-Mart.

Before it went private, Toys “Aren’t” Selling was a highly seasonal retailer with flat sales growth and awful stores in desirable locations. Despite a 33% gross profit it brought less than 2% to pre-tax profits—implying a cost structure amounting to 31% of sales.

And that was before the company went private.

Wal-Mart—which is still growing 10% a year with a quarter trillion in sales—generates more than 5% in pre-tax profits on a 23% gross profit margin, implying a cost structure of about 18% of sales.

Hmmm....18% cost structure versus 31% cost structure...

I think we know who is going to capture the moment on Black Friday. Like the song says, you can do anything you set your mind to, man.

Jeff Matthews
I Am Not Making This Up

© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.


Its_strange said...

recently we have read about the drop in newspaper circulation. We have read about advertising leaving print and going online. Seem like we are experiencing a serious spurt in net use or acceptance. Where will it show up next ? Retailing ? Net TV or phone ? ...It just seems like a serious spurt is underway . Any idea's ?

Monday i had a cheap CD player installed in my car at Best Buy . The man said its all Satellite radio now. One day a E-Trade type company will give Satellite radio away free for those who trade X amount a year. A Wal-Mart will give satellite radio away if you spend X amount. Maybe a Whole foods

Its_strange said...

Open a account with X bank and get a toasted ? Nope, get a Satellite radio. Come on guys. You are smarter then me. Think a XMSR or SIRI might avoid the need to float a secondary if they do something creative with a Wal-Mart ?

Schriver said...

Walmart and Target did pretty much kill all the big box and specialty toy chains years ago tho - our stuff (Kenner-Parker) used to go on sale for less than we sold it to Wal Mart and Target for, as a giveaway to drive traffic. Having no ready to wear to sell to make up for the negative margins now prevalent on toys, Toys R Us, Kay-Bee, Lionel, Childrens World et al never had a chance.

Ivan D. Ivanov said...

It's hard to argue with sheer retail size and determination to crush competitors -- it's difficult to imagine any economic environment where WMT would be worse off than its major competitors across the retail chain. WMT presented a great buying opportunity about 6 weeks ago (see for more details). Like or hate it, WMT is there to stay -- the stock is almost synonymous with American consumerism.

Chug-A-Bug said...


walmart already moves a lot of XM (and a smaller amount of sirius). XM, at least, has no need to float more shares. SAC is in the 50s, CPGA is below 100, and it's going to hit CFBE sometime next year with plenty in the bank.

Satellite radio isn't all that expensive. You can get a Roady2 for $20. Ebay Motors is giving away the XM audiovox this month with car sales.

Razors and razorblades.

mamis said...

Jeff -

Do you have any thoughts on the extent to which economies of scale impact a retailer's cost structure? It's tempting to say "you have 31% opex and your competitor has 18%, therefore you're a lousy manager", but I'm wondering how much of that is simply little guys vs. big guys, rather than dumb guys vs. smart guys.

I know groceries are a completely different business, but I wouldn't say ABS is better (or worse) than WFMI because they have a lower cost structure.

To be clear, I'm neither agreeing nor disagreeing with you -- just wondering. I'm a retailing ignoramus.

The Irrational Investor said...

Interesting to read in light of the recent statement from Petco's CEO about their current earnings situation. Petco actually saw an increase in y/o/y rev for the most recent quarter in spite of the CEO's claim that gas prices were preventing customers from making store visits.

So, are Walmart taking a leaf out of Petco's playbook, and driving down margins as far as possible in order to increase product demand? Didn't Herb Kelleher once say that you can make a pizza so cheap that nobody will eat it?

Its_strange said...

Once again, i just don't get it . Is Chrysler giving a special deal to a online liquidator or is this just a words ? How does oSTK make any money with this deal ? Would Chrysler give someone out of the blue a better deal than its long time dealers ? Can someone explain this to me ?

Jeff Matthews said...

"Mamis": Even my trusty Bloomberg can't go back far enough to the time Wal-Mart's sales volume was the equivalent of what Toys "Aren't" Selling manages to do in a given year--that would be the best way compare the two and allow for the fact that size does matter when looking at cost structure. Good point.

(Keep in mind WFMI and the regular grocery chains have a different cost structure for a reason: WFMI sells higher priced foods and makes good money doing it. Same reason TIF has a different cost structure versus ZLC.]

Xyba said...

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Ryan said...

I'm not sure if this explains the Wal-Mart/Toys-R-Us discrepancy; but, some retailers put occupancy costs in Cost of Good Sold and others do not.

Thus comparing one retailer's cost structure to another using Gross Profit minus Pre-Tax Profit can return apples-and-oranges.

That being said, I have no doubt that Wal-Mart was the low cost provider of the two. Just a quibble with the metric.