Tuesday, November 07, 2006

Calls of Note Part 5

- Oppenheimer comments on on Wal-Mart (NYSE:WMT) saying that as the holiday season approaches, the outlook for profit growth is clouded by weak sales, an improper women's apparel assortment, and the need for heavy apparel clearances. Risks of a pull back for WMT shares have increased, but they still believe strongly that Wal-Mart's changes will produce greater profits and multi-year appreciations for WMT shares.

October's 0.5% same-store sales gain for the Wal-Mart stores was the weakest since November 04's deeply disappointing results. November 06 is shaping up as another disappointing sales month, the third in a row.

Remodeling and special projects were supposed to be completed by the end of October, but will carry through mid-November. Shoppers rejected much of the women's apparel assortments for fall, especially skinny jeans, which are too far ahead on the fashion curve for most WMT shoppers: They want basic styles. Metro 7 expanded into 1,500 stores but sells well in only 600.

Large quantities of apparel are marked down for clearance. OpCo expects heavy clearances to continue for several months. With hot prices for holiday goods, toys and electronics particularly, WMT hopes to get through the season successfully, but the basis for that conviction seems tenuous. The firm has abandoned their expectation that for 4Q/06 WMT might surprise on the upside.

A reduction in capex would increase cash flow, EPS, shares repurchases, dividends, and ROI--assuming profits (R) remain unchanged or improve.

The major factor, by far, in firm's opinion, that contributed to Wal-Mart's unimpressive ROI was that it fell behind the times in appearance, service, and product quality, while it invested heavily to build stores and infrastructure. It is now correcting its operating deficiencies. They have a strengthening conviction that as the field organization gains experience and buying changes are made, Wal-Mart's new look and attitude will generate
same-store sales and profit growth within the next 12-18 months.

The designer for US Wal-Mart's new look is the same person who reworked Mexico's Suburbia stores, which are a big success story for Wal-Mart de Mexico (WMMVY).

To overcome a decade of neglect, Wal-Mart is engaged in a huge corrective effort. OpCo foresees strong benefits for Wal-Mart, and a tsunami spreading across much of retailing. Maintains Buy.

Notablecalls: Outstanding Investor Digest highlighted Bill Miller of Legg Mason, Arnold Van Den Berg of Century Management, and Bill Nygren of Oakmark Funds all being high on large caps. WMT was a among the favourites with PFE, MSFT, DELL and GE. Not telling to buy WMT here but I think that the pessimism surrounding the name lately has become a bit excessive.

1 comment:

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