WMT and the economy
WMT is the largest retailer in the US (Costco (COST) is #2). Despite its very large size, WMT has a distinct economic focus, one based in its roots as a chain of quasi-department stores for small towns. About a third of its customers are relatively low income blue-collar workers, whose personal fortunes tend to be very highly linked to the strength of the overall economy. Because of this, when WMT profits start to rise, as they have been over the past several quarters, it’s a sign that economic recovery is strongly rooted and has spread relatively widely.
WMT as an investment today
In the past, periods like this have also been good ones to own WMT shares. Two factors, however, suggest to me that this time could be very different:
—the dollar stores. During recessions, consumers tend not only to cut back on expenditures but also to trade down, that is, to patronize less expensive retailers. In the case of many WMT customers, that means turning to the the dollar stores, whose target customer has been a single head of household who earns $20,000 +/- a year, who walks to the store and who visits several times a week. During the last downturn, the dollar stores decided to shift their business model and expand their product offerings in hopes of holding onto their new, more affluent former WMT customers when the economy improved. The industry has also consolidated into a smaller number of larger firms, to the same end.
As a result, WMT has new competition for the low end of its market demographic, a segment that becomes more important as customers who have traded down to WMT from, say, Target, return to their former niche.
–like many traditional retailers, WMT hasn’t paid enough attention to the internet. Its recent decision to acquire jet.com for $3 billion+ is evidence that WMT realizes it has to play catchup. I think jet.com’s most important asset is its innovative top management. Whether it will mesh well with traditional WMT executives remains an open question.