Viva Wal-Mart!

EVERYBODY HATES WAL-MART. Recently, three business magazines ran "Wal-Mart is bad" stories. Union employees at three California supermarket chains launched strikes because of the effect Wal-Mart might have when it adds groceries to its West Coast repertoire. Stock analysts can't imagine how WMT could continue to grow—a third of them rate it a "hold" (analyst slang for "turd")—and rush to diss the company. And even the government is mad: The Feds recently raided Wal-Mart, looking for illegals. (Shockingly, they discovered a few mixed in among the 1.2 million employees.) How can a store visited by 138 million people each week be so damn . . . unpopular?

The answer, of course, is that it's not. In fact, it's wildly popular. Saying that Wal-Mart is the biggest retailer ever doesn't really tell the story. It is three times bigger than its nearest rival. It generates eight times more revenue than Microsoft. It sells more than Target, Sears, Kmart, JCPenney, Walgreens, and Kroger combined. It has net sales greater than the GDP of Sweden. It sells one out of every three diapers sold in the United States. And the behemoth plans to open a whopping thousand more supercenters in the U. S. alone over the next five years. That's not because people don't like to shop there.

Magazine writers, brokerage analysts, and social critics who lament the Wal-Martization of America probably aren't among the 82 percent of Americans who bought something at Wal-Mart in 2002. Eighty-two percent! Elitists don't count pennies at Sam's Club. They don't care that Wal-Mart's practices have raised the standard of living for hundreds of millions of people. They haven't been to HQ in Bentonville, Arkansas. I have. And that's why I'm a believer.

Wal-Mart is not just better at selling stuff cheaply than Kmart or Target; it's an entirely different animal. If you're looking to make money, bet every penny you have on WMT.

There is a certain inevitability to the current doubts about Wal-Mart. Over the past few years, investors and analysts have attacked former sacred cows like Coca-Cola, Disney, and McDonald's. In fact, a small slowdown in the company's decades-long growth has made enough investors and commentators abandon ship that Wal-Mart now looks cheap. If you didn't know how great Wal-Mart was in its youth, you'd never understand why its middle age is phenomenal. Yes, the last time sales rose year over year by more than 20 percent was fiscal 1995. Since then, however, Wal-Mart's sales have risen yearly by the following amounts: 13.5 percent, 12 percent, 12.5 percent, 16.7 percent, 19.9 percent, 15.9 percent, 13.8 percent, and 12.3 percent. Based on preliminary figures for fiscal 2004, Wal-Mart's sales have increased 11.6 percent. Through recession, dot-com mania, war, terrorism, and terrible publicity, Wal-Mart has delivered sales growth of better than 10 percent every year.

Furthermore, Wal-Mart aggressively seeks ways to continue its growth. It now has as many supercenters (combination grocery-retail stores, built on approximately twice the space as the retail-only stores) as retail outlets, and the company figures it has plenty of room to open more. In 2001, when Wal-Mart opened its thousandth supercenter, industry observers predicted that it was approximately halfway to its goal. Since then, the supercenters have done so well—many do more than $100 million in business—that the company realized that it can open supercenters much closer to one another, as well as in much smaller markets, than originally predicted.

The supercenters presumably have smaller profit margins than retail stores, but that doesn't bother Wal-Mart. Its inventory-control and information-technology systems are so far ahead of competitors' that it can enter a business with lower margins if the top line is sufficiently attractive. Wal-Mart, with only ten supercenters in 1991, is now the nation's largest grocer. (It is also the nation's third-largest pharmacy.)

Usually, sales growth can occur only as margins decrease; profit is sacrificed in the name of expanding market share. Remarkably, Wal-Mart's profits are rising even faster than its sales. In six of the seven fiscal years ending in January 2004, the company's net income grew more than sales.

Yet all of these fundamentals, while impressive, don't reveal the heart of why Wal-Mart is not just a better store but a fundamentally different kind of business.

Here's an example: While some stores might install state-of-the-art software to manage inventory, Wal-Mart hands over much of the management of its floor space to the vendors themselves. Once a vendor is doing enough business at Wal-Mart to be trusted, the company will actually allow that vendor to decide how much of its product to put on the floor. After all, who better to ensure a store is stocked than the company with the greatest interest in moving that inventory? Done right, this allows the vendor to better plan its production, since it knows in advance how much product one of its biggest accounts will be ordering. And what happens if a vendor gets cute and orders too much? According to one vendor partner I spoke to, "Wal-Mart gives you one mistake. You don't risk making a second. They hold you accountable."

Accountability is a theme that runs throughout the company. A couple years ago in these very pages, I slammed Tyco, which was then a Wall Street darling. I criticized its obtuse financial statements and the belligerent, smarter-than-thou attitude of its CEO. The company cared more about impressing bankers and investors than it cared about impressing customers. Wal-Mart, on the other hand, has never gone out of its way to woo Wall Street. Wal-Mart issues simple and transparent financial statements, a habit dating from long before corporate governance became chic. The fact that the company provides monthly and even weekly sales information makes it even more difficult for something to go wrong without investors knowing about it.

For other kinds of insight into Wal-Mart, you have to go to Bentonville. And that's the thing. The company doesn't really need journalists poking around its headquarters. It doesn't need to attract attention from Wall Street analysts. But if more journalists and analysts did go to Bentonville, they'd begin to understand how different WMT is.

When Wal-Mart executives throw a dinner to welcome a guest, they do it in the nice-but-modest golf clubhouse in the housing development where many of them live in nice-but-modest homes. Wal-Mart's headquarters are in a bland rectangle of a building that could easily be mistaken for a warehouse. CEO Lee Scott's small, plain office overlooks the parking lot. A company like this couldn't spend $15,000 on an umbrella stand if it tried. Instead, Wal-Mart uses that building to instill a parsimoniousness that permeates the entire company.

I attended a meeting of about four hundred Wal-Mart managers. The faces of CEOs from rival retailers lined the meeting-room walls, a reminder that there's always someone hoping to eat Wal-Mart's lunch. While one exec congratulated the team on its most recent successes, another noted that Albertsons had been making a push in the Dallas area and demanded greater focus and effort. It's a good-cop/bad-cop approach that manages to capture the rapt attention of a roomful of true believers.

How can I tell the belief in the company's value mantra is real? Well, the vendor I spoke to put it this way: "The buyers for every other big retailer we do business with expect things from us—not exactly bribes, but concert tickets and Christmas gifts. When you go out for lunch with the buyer at Wal-Mart, he won't even let you buy him a Coke. It's all business."

Recently, I heard a professor on a radio program tsk-tsk that Americans don't appreciate the "real costs" of shopping at Wal-Mart, claiming they suffered from "mass hypnosis by bargain culture." Yuck. As if Americans need to be hypnotized before paying a dollar for something others sell for two. Look, I live in a quirky old house and shop at charming mom-and-pop stores. These things matter to me. But I can't stomach the notion that my taste should dictate to others. It's despicable for elites to decide their cultural values are more meaningful than Wal-Mart's diaper values.

Not only is Wal-Mart running circles around the toughest competition it has ever faced—Target and Costco are presumed by haters of the Mart to be nipping at it from above and below—but now is a particularly good time to buy. After WMT's stock price held steady throughout the bear market of 2000 to 2002, it was poised to rise in 2003 as consumer spending and confidence rose. In November 2003, however, Wal-Mart dumped a bucket of cold water on some very hot prospects by downplaying its good operating results, crediting them to some favorable year-over-year comparisons. Management also cautioned that consumers still seemed pokey.

Investors punished the company disproportionately. After the stock reached nearly $60 at the beginning of November, it dropped to $51 and remained in the $50s through February, before finally approaching $60 again at the beginning of March. On a historical basis, Wal-Mart shares are a bargain. Even at $60, Wal-Mart was trading at twenty-nine times trailing earnings, at the bottom of its five-year range of twenty-seven to fifty-nine times earnings. Price-to-sales and price-to-cash-flow ratios are also at the bottom of their five-year averages.

If you buy WMT now, you'll be in the company of one of the shrewdest bargain hunters ever—Wal-Mart itself. Earlier this year, the company authorized a $7 billion share-repurchase program.