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.