Wal-Mart (WMT): Getting Real Hard Not To Buy

In early May I did a post about Wal-Mart (WMT) in which I mainly commented on two things, the lack of a substantial share repurchase program and stores that are old and dated. Wouldn't you know what happened next? On June 1st at the annual meeting Wal-Mart announced they were enacting a $15 billion share buyback plan and slowing the store growth to better reinvest in existing locations. Well, if that don't get you thinking, a hugely profitable company that seems to be fixing your biggest complaints about it.

Both Warren Buffett at Berkshire Hathaway (BRK.A) and Wally Weitz at the Weitz Value Funds bought shares in the summer of 2005 at levels virtually identical to today's prices and still hold the shares today. Now, this is not to say they made a mistake buying shares 2 years ago that have been flat, it is to say that as two of the greatest value investors ever they saw value in shares then. That value, is enhanced today. How? Earnings since that summer have increased 20% and the dividend has increased the same, yet the price you have to pay for a share of those earnings and a larger dividend check has remained virtually constant. Again, I know I have been critical of Warren lately but I have never criticized one of his picks and I challenge anyone to find where I have, I have only criticized the size of his picks.

In April I wrote "There seems to be a trend recently in former high flyers like Wal-Mart (WMT), Starbucks (SBUX) and now Home Depot (HD) to not fully recognize that they cannot continue to just grow and grow to get results. There comes a point in time where you begin to just cannibalize your own customers. Rather than focusing on their current locations and improving them and their customers experience in them, they still have an almost myopic focus on more locations. All three are experiencing discontent among many of their core customers as they have felt “neglected” or taken for granted and are leaving for competitors like Target (TGT), Dunkin’ Donuts, McDonald’s (MCD) and Lowes (LOW) whom they feel more appreciated by, who have grown smarter, and have retained what made them popular. As a result, all three are experiencing difficulty and an onslaught of negative sentiment."

Thursday I read a post at Seeking Alpha by Whitney Tilson who echoed this sentiment in a post, "Stop pretending you’re a high-growth growth business...You’re a slow-growth business. But a slow-growth business, managed properly, producing unbelievable amounts of capital and returning capital to shareholders can be a home-run investment."

He continued by saying Wal-Mart today reminded him of "McDonald’s 4 1⁄2 years ago, when it, too, was everyone’s favorite whipping boy, responsible for the obesity epidemic, etc. McDonald's has engineered a remarkable turnaround thanks to slowing down growth, reinvesting in its stores, focusing on delivering better products and service to customers, improving its corporate image, spinning off ancillary businesses, rationalizing its international operations and returning capital to shareholders – all of which Wal-Mart can and should do."

This is one of the single best analogies I have ever seen. Just brilliant and I am pissed I did not say it first. McDonald's turned it around by providing more quality items without losing what made then great, value and service, but, can Wal-Mart do it?

My original post ended: "...when you think "cheap", you think Wal-Mart, when you think "value", you think Target (TGT). Want the answer to the question in the last paragraph? Thursday at the office we were debating what to do with a new work station we will need. How should we go about setting it up for a computer and where could we get a good one quick and reasonably. The first words out of two people's mouths were? Dell (DELL) computers at Wal-Mart. Now I do recognize they are stripped down Dell's but, they are Dell's none the less and Dell does have a reputation of making a good computer. The point is that we can pick these Dell's up at Wal-Mart for $699, a good "value" and people are already beginning to recognize this. It would seem someone in Bentonville getting with the program. With Wal-Mart's ability to price items for consumers, when they flick the switch from "cheap" to "value" in consumers minds, folks will come streaming in. Just like they have been for McDonald's.